Angel investing, venture capital and equity crowdfunding: what is the difference?

The words are used as if they were three sizes of the same investment. They are three different arrangements between the person who provides the money, the company, and the rules. None of them is a recommendation to use that arrangement.

Angel investing

An angel investor is a person putting their own money into a young private company, often early, often because they know the sector or the founders. There is no single statute that creates the category worldwide. What is common is the shape: one cheque or a small group, limited information, and no fund manager standing between the person and the company. The investor then has a problem the cheque does not solve. Later rounds can dilute the stake. The company may need more money than the angel will provide. Selling the stake usually waits on a later buyer, a sale of the whole company, or a listing that may never come.

Venture capital

Venture capital is a fund. The fund raises money from its own investors, often institutions, and buys stakes in a portfolio of private companies. The person who writes a small cheque into a startup is usually not a partner in that fund. The fund’s logic is the portfolio: it expects many companies to disappoint and depends on a few to matter a great deal. That logic belongs to the fund’s agreement with its investors. It is not automatically available to a reader who likes the same companies. Terms matter inside the fund’s deals. A preference that is paid before ordinary shareholders changes who gets the money if the company is sold for a modest price.

Equity crowdfunding

Equity crowdfunding is an offer of shares, or of instruments that are meant to become shares, to a wider group through a platform. The FCA separates it from loan-based crowdfunding, in which people lend and expect interest and repayment, and from donations. Investment-based crowdfunding, in the FCA’s consumer note, is the purchase of shares or similar instruments, often in smaller companies, and is described there as high-risk, hard to sell, and outside the UK compensation scheme if the business fails.

The US version has a name and a ceiling. The SEC’s Regulation Crowdfunding page states that eligible companies offer securities through an SEC-registered intermediary, that there is a maximum aggregate amount a company may raise this way in a twelve-month period, that non-accredited investors face limits across offerings, and that the securities generally cannot be resold for one year. Those amounts are US law as stated on that page. They are not the European rule. The EU regulation of 2020 licenses crowdfunding service providers. A campaign that looks identical in two countries can be two different permissions.