SmallBiz Essentials: What Are the Different Types of Early-Stage Investors?

Welcome to the SEC Small Business Advocacy Office’s blog where we share some fundamental capital-raising concepts.

What are the differences among “friends and family” investors, angel investors, and venture capital funds?

Friends and family, angel investors, and venture capital funds are common types of investors in early-stage companies. They differ in their typical investor profile, the stage or funding round(s) in which they generally invest, the structure of their investment, their level of involvement with the company, and the size or scale of their investments. That said, while some of these terms are defined in our federal securities law, not all of them are, and it may be helpful to explore what each means in practice.

Are there different funding rounds or rules for each type of investor?

In a nutshell: no. But let’s take a closer look and break down some of these terms.

A funding round is when a company raises money from investors on the same or similar terms within a specific period. The capital-raising industry often refers to rounds by stage, starting with a pre-seed or seed round, followed by Series A and successively lettered Series rounds. The industry may also refer to rounds by investor type, starting with “friends and family” and moving on to “angels” and “VCs.”  However, although different categories of investors often focus on different rounds, this is not always the case, and investor types do not always line up neatly with funding rounds. For instance, investors that typically focus on later-stage rounds may also participate in a seed round.

Turning to the capital-raising rules, federal securities laws require every offer and sale of securities to be registered or qualify for an exemption from the registration requirements. Just like funding rounds and investor types do not always line up neatly, industry terms do not always align with regulatory language or definitions. While the capital-raising industry often distinguishes between funding rounds by type of investor or series round, the federal securities laws do not differentiate in the same way. This means that regardless of whether the company calls it a “friends and family round,” “angel round,” “seed round,” or “Series A,” the company must structure the deal to fit within one of the offering exemptions if it wishes to avoid having to register the offering. The choice of exemption may depend on the size of the investment, the location of the investors and the company, the sophistication of the investors, and whether the investors qualify as accredited investors. 

Friends and Family

Investor Profile

Many entrepreneurs fund their startups from their own savings, as well as by raising capital from their personal network of friends and family. Most friends and family are investing based on their relationship with the founding team and do not bring strategic industry knowledge.

Company Stage

Friends and family tend to invest at the earliest stages of a company’s life cycle in the pre-seed or seed round. Friends and family have varying levels of investment sophistication but are generally, as a group, the least sophisticated of the various investor types.

Investment Structure

Friends and family tend to invest directly in the company rather than through a pooled investment vehicle or fund. The form of investment may be structured as loans, convertible debt, or equity, depending on the needs of the investors and the company.

Level of Involvement

Friends and family investors tend not to be actively involved in the oversight of the business. Because of the close relationships involved with friends and family investors, founders should take care to clearly disclose the risks of the investment and especially the downsides if the company is not ultimately successful.

Scale of Investments

The amount of the friends and family round tends to be the smallest at around $10,000 to $50,000.

Angel Investors

Investor Profile

Angel investors are generally high-net-worth individuals who invest their own money directly in emerging businesses. There were 422,350 active angel investors in the U.S. in 2023. Most angel investors are accredited investors, and many are current or former entrepreneurs themselves. As such, many (but not all) are sophisticated investors. Angel investors also generally prefer to invest locally, with about 1/3 of them preferring to invest within a 150-mile radius.

Company Stage

While the company life cycle stage can vary, angel investors tend to invest in early funding rounds, including pre-seed, seed, and Series A rounds.

Investment Structure

Because angel investors are typically investing on their own behalf, they often pool their funds with other investors (forming what is often referred to as a syndicate). This means that they form a group with other angel investors to evaluate and invest in deals together. Coming together as a syndicate allows them to participate in larger deals with smaller investment amounts and limits their portfolio exposure. Investments tend to be structured as either convertible debt or equity, depending on the preferences of the investor and company.

Level of Involvement

Angel investors often bring strategic industry knowledge to the company, taking an active role as a director or advisory board member.

Scale of Investments

Angel investors tend to syndicate and invest across multiple companies, pooling together $200,000 to $400,000 per deal. In 2023, angels invested over $18.6 billion in early-stage companies.

Venture Capital Funds

Investor Profile

A venture capital (VC) fund is a type of private fund that typically invests in rapidly growing companies, often with a specific industry focus. VC funds are generally structured to last at least ten years, with the first few years focused on investing in portfolio companies, followed by monitoring their investments, and then “exiting” and hopefully returning a profit to their own investors (or limited partners). Specific criteria for exemption from registration apply to both the VC fund and its investment adviser under the Investment Advisers Act, including pursuit of a venture capital strategy, limits on redemption rights, qualifying investments, and the use of leverage.

Company Stage

VC funds invest in companies across their growth life cycle, from Series A through their public offering. Many invest repeatedly in their portfolio companies when these companies seek to raise subsequent rounds of capital.

Investment Structure

VC funds may syndicate together with other funds during a funding round. Because of regulatory requirements, most venture capital investments are structured as equity, such as preferred stock. VC investments have a long time horizon and are generally locked in until a liquidity event (such as an acquisition or initial public offering), when the VC fund and its investors hope to realize profits from their investment.

Level of Involvement

VC funds tend to take an active role in mentoring their portfolio companies by taking a seat on the board of directors or advisory board. Traditional VC investors provide an array of services to their portfolio companies, including strategic guidance, connections to other investors, connections to customers, operational guidance, and support on hiring key personnel. Over sixty-two percent of venture capital funds have contact with their portfolio companies at least once a week.

Scale of Investments

Aggregate venture capital investment has tapered off in recent years falling from approximately $330 billion in 2021 to approximately $150 billion in 2023. Median deal size in 2023 was approximately $5 billion, while average deal sizes ranged from $15 billion for series A and B to $24 billion for series C and D. 

This resource represents the views of the staff of the Office of the Advocate for Small Business Capital Formation. It is not a rule, regulation, or statement of the Securities and Exchange Commission (“Commission”).  The Commission has neither approved nor disapproved its content. This resource, like all staff statements, has no legal force or effect: it does not alter or amend applicable law, and it creates no new or additional obligations for any person. This resource does not provide legal advice.

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