VC or Angel: Who Should You Go to for the Funding You Need?

2016-12-01T19:13:47+00:00November 23rd, 2015|Startup Culture|

Three kinds of equity investors support entrepreneurs: venture capitalists, angels, and friends and family. While friends and family want to make money, their investment in your business is also motivated by love. This article is focused on investors whose motivations are less complicated: angels and venture capitalists. They just want a return on their investment. These investors have a lot in common, but they also have differences. I’ll talk about both.

An angel investor is an accredited investor whose net worth is greater than $1 million (excluding a primary residence), or whose individual income exceeded $200,000 ($300,000 for couples) for the past two years, with the expectation for that income to continue in the current year. Angels invest their own money, and collectively, they invested $24 billion in companies in 2014, according to the Center for Venture Research.

Venture capitalists, on the other hand, invest other people’s money. VCs invested $48 billion in 2014, according to the MoneyTree Report, which tracks venture capital investment.

The difference between venture capitalists and angels

In a prior article, I tackled how to capture the eye of a venture capitalist. For the most part, the same things will capture the attention of an angel. Some differences include:

  • Both angels and VCs invest in large and lucrative markets. VCs target billion dollar plus industries. A smaller market can still attract an angel. Some angels may be okay with a market that is just a few hundred million dollars.
  • An average angel investment is in the range of tens-of-thousands to hundreds-of-thousands of dollars, while the average VC investment is generally millions of dollars.
  • Angels are more likely than VCs to focus on seed- and start-up-stage companies. VCs tend to focus on the growth stages of a company: Series A and higher.
  • Since angels are more likely to invest in earlier rounds, yet exit at the same time as VCs, they have a longer timeline to their exit.
  • Software and internet companies dominate VC investments. Angels invest in a broader array of industries.
  • Angels only answer to themselves. They are free to invest in whatever they fancy. As a result, some may have an eclectic portfolio, while others may invest in the industry they know best. Venture capital funds have a specific focus that they must adhere to.
  • Both want a significant return on investment but, for some angels, it is less about investing in a company that claims it will have a whopping return, and more about investing in a passionate entrepreneur who is doing something purposeful and whose values align with the angel’s. That doesn’t mean s/he isn’t looking for a solid return, it just means that other factors may trigger their investment.
  • Traditionally, angels have invested close to home, while VCs are less geographically bound. However, equity crowdfunding platforms for accredited investors such as Crowdfunder, CircleUp and SeedInvest are making it easy to invest in companies across the country and even around the world.

So, what do angels and VCs have in common?

Both angels and VCs may provide contacts, advice, talent recruitment, strategy and additional funding. While this is baked into the business of the VC, it is an individual choice for the angel. Additionally, investing in an entrepreneur who has integrity and passion is tops for both, said David Rose, a well known angel investor, in his TED Talk.

Both also look for:

  • an experienced entrepreneur (even if s/he hasn’t succeeded yet)
  • domain expertise
  • technical skills as well sales and marketing
  • leadership ability
  • grit
  • vision realism
  • coachability

While this may seem a formidable list, as you assess your business and yourself, you may be surprised at how many you can check off.

By understanding the similarities and differences between VCs and angels, you’ll be more effective when choosing who to approach for funding—and how to approach them.