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Differences in Investing in Venture Capital Funds vs. Angel Investments

  • Apr 29
  • 7 min read

We’ve all heard that most startups fail, but many doctors in our online physician communities wonder how they can get in on the ground floor of companies that we think are going to be the next best thing, in hopes that their investments will yield large returns. There are two ways that physicians typically are presented investment opportunities in this space - as angel investors in individual companies, or as investors in a larger venture capital (VC) fund that is investing in many companies simultaneously. Below, we’ll explore the differences between angel investing vs investing in venture capital funds, the pros and cons of each, and how to decide what’s right for you.


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Should I invest in an angel investment vs a venture capital (VC) fund? Four differences to consider when evaluating


What is the big picture difference between angel investments and venture capital (VC) funds?


The biggest thing to know about the difference is that with angel investing, you’re investing in an individual company, whereas with a venture capital fund, you’re investing in a structure that is deploying investments across many companies. It’s much like the difference between investing in an individual stock (angel investing) and investing in an index fund (venture capital fund).


Because of this, the risk profile is different. Though both are considered riskier investments compared to most of the more common physician investment asset classes, venture capital funds do spread the risk across several companies. The fund knows that some companies will fail. Their hope is that a handful of the companies will be successful, more than negating the lost money into the companies that don’t turn out to be profitable. In some cases, one wildly successful investment could carry the entire fund (imagine being an early investor in some of the major tech companies today!). This is a different approach than that of an individual angel investment, where one company's success or failure determines if there is ever a return on investment.


An additional thing to know is that your involvement in each can differ significantly in terms of capital required to participate and involvement once funds have been deployed.



What is angel investing?


Angel investing is typically done at a very early stage in a company’s life cycle. Usually when startups are seeking angel investors, it’s to be able to get an idea off the ground. They may raise this money before formally launching their company in a friends and family or seed round, and are typically asking investors to believe in a vision that they trust the founders to bring to life.


When raising an angel investment, most founders of companies will tap their personal networks for friends, family, or colleagues that already believe in and trust them and that they can easily get in front of (as it’s always a challenge to hit people up for money!). They may also go to angel networks of people that are looking to invest in the space that their company is building in, or other successful entrepreneurs that may have money to invest and are familiar with their space. Online angel platforms and syndicates also exist.


In health tech specifically, many companies like to directly approach physicians or other clinicians for investments, because they know that you understand the space and the needs. 



What is your role as an angel investor?


This will vary, from just being a person who writes a check in support, to a more involved role, depending on what the founder needs and what they think you bring to the table. They might have a very intentional reason for bringing you on board beyond your capability to write a check. These roles could include:

  • Advising the founders

  • Making intentional introductions to help the company grow and with go to market



How much money do you typically invest in an angel investment?


You’ll be asked to directly invest your own money into the company for some form of equity in the company that can result in an upside if the company is successful. 


While the amounts can vary, these checks can be as little as a few thousand ($5000 seems to be the minimum) to a six figure amount like $100,000.  


Read more about angel investments.



What does it mean to be an investor in a venture capital (VC) fund?


Being an investor in a venture capital fund is very different than being a venture capitalist. 


In your role as an investor in a VC fund, you are passive once you’ve written the check. You are not the person responsible for picking the investments, maintaining the fund, or being involved in the companies that it invests in. Note that some funds may provide opportunities for its investors to help pick or weigh in on the investments, or even advise the portfolio companies, but this is not a formal responsibility in most funds. 


The VC fund will pick and manage the deals and the relationships with the company founders, so your job as someone looking to invest in these funds is really to make sure you believe in the ability of the VC team to be able to network effectively to find good investment opportunities, pick the winners, and responsibility deploy the capital of the fund to meet its stated investment thesis and objectives. The returns of the fund will depend on luck, yes, but also in large part depend on the expertise of the VC team.




What’s a head to head comparison of VC funds vs angel investments?


Active control versus passive delegation


Angel investors have total control over which companies they are investing in, and are more likely to be involved in supporting the company that they invest in, whereas those investing in a VC fund delegates control over decisions to the VC management team, and are largely hands off afterwards in most (but not all) funds.



Concentration versus diversification


In angel investing, you devote your investment towards one idea that you think is going to be a winner, while when you pick a venture capital fund to invest in, you are investing in a diversified portfolio of companies that fit an investment thesis you believe in.



Smaller investment vs larger investment


Angel investments tend to have smaller minimum requirements to invest (can be as little as a few thousand dollars), whereas VC funds tend to have higher minimums, starting usually at 50k or above (though there can be exceptions). VC fund minimums can be in the multiple 6 figure or even 7 figure range.



How do I decide which is better for me, angel investing vs investment into a venture capital fund?


It’s important to look at the factors above in terms of differences to decide what’s right for you. Situations where you might want to consider each are:



Angel investments


  • There is a specific company or idea that you really want to invest in because you really believe it’s going to be successful

  • You want to support a friend, family member, colleague, or other connection

  • You want to get involved in the company and have the time to do so

  • You want to dip into the innovation space with a smaller investment amount



Venture capital fund


  • You want to invest a significant amount amount into the innovation ecosystem, and have the money to do so

  • You want to be more hands off and don’t have the time to pick companies

  • You trust professionals in this space to pick the companies more than yourself

  • You want more diversification across several companies

  • You think you’ll get access to more deals from promising companies through the venture capitalists and their networks than you would get on your own.


Of course, none of these are absolutes, and there are plenty of hybrid models out there. Additionally, lots of people invest both as angels as well as through a venture capital fund. You just have to make the decision based on the amount of capital and time you have, and based on your access to these deals and your confidence in picking companies yourself.



Conclusion


As the health tech space expands, more and more doctors are interested in becoming a part of the innovation ecosystem. One way to do this is through investing in companies in the space through angel investing and investing in venture capital funds. Ultimately, what’s right for you will depend on the amount of money you have to invest, the opportunities available to you to invest in, how active or passive you want to be once you’ve written a check, and how much you trust your abilities to weed out the winners from the losers.



Additional health innovation resources for physicians


Sign up for our weekly PSG newsletter for alerts on new educational content, free webinars, and more. We do a series of webinars on entrepreneurship and health innovation, and some of our sponsors own VC funds or companies seeking investors.


Also, join us at HLTH and ViVE events through our partnership with HLTH. We offer discounted tickets, specific physician programming and networking, and opportunities to consult with companies in the space! Learn more at our Physicians at HLTH webpage.


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