Venture Capitalists vs. Angel Investors
Originally posted on 3/29/19
Clay is Managing Partner of Stout Street Capital, which he co-founded in 2016. Upon graduation from the University of Colorado, Clay joined a large Washington DC-based nonprofit where he led regional development efforts in the Southeast, contributing to annual fundraising of $25 million. Clay then served as the Business Development Manager for Denver-based Strata Resources Inc., before founding Stout Street Capital with business partner John Francis to become early investors in Colorado’s burgeoning tech scene. Clay specializes in fundraising and deal flow management for the fund.
So you’ve decided it’s time for your company to grow with some outside funding. Now you’ll want to learn as much as you can about investors so you can find the best fit for your business.
There are several key differences in approach between angel investors and venture capitalists when you are considering what will be the best fit for your business. Both investors are looking for the same thing: to see a company grow and gain a profit. In this regard, they both have your business’s best interests in mind.
Venture Capitalists vs Angel Investors
VCs and angel investors seem very similar from an outside view. The differences however, are considerable; they differ in how they invest, when they invest, where their funds come from, and more.
Angel investors are often related to or friends of the business owner or, in some markets, high-net-worth individuals(HNWIs) who are part of organized angel groups. They simply believe in the person and the idea and are looking to fund that belief. Think of an angel investor as more of a believer-mentor. They want to help you succeed and be involved in the process, and an investment from angels are not very dilutive(founders still retain majority control).
Venture capitalists are more straightforward institutions. VCs tend to guide businesses by helping them make the right hires and connecting them to markets they normally wouldn’t have adaccess to; however, in some cases, they may also want a board seat to keep a close watch on the company and have a say in deciding its future. VCs generally invest larger sums and the successive funding process tends to dilute the ownership of the founders.
Here’s a breakdown of the main differences:
Investment stage – The angel investor often will invest in companies very early, in some cases in the idea phase when the product is still not ready or working. Their decision is based on how well they like the idea or their personal connection to the founder.
Venture capitalists usually tend to invest in post-concept and post-product stages when a company can show a working product, traction through sales, and product refinement through pilots to mitigate risks. The first round of institutional/VC money usually comes with funding rounds greater than $1M.
Funds – Angel investors fund with their own money and are accredited investors. This means that they have a minimum net worth of over 1 million dollars and an annual income of over 200k.
VCs are usually funded by investment companies or funds. VCs raise capital from other accredited institutions, HNWIs, and family offices to form funds. VCs usually invest from a large pool of funds and invest in multiple opportunities with a specified investment thesis[a specified investment approach defined by portfolio managers that outlines the investment process and the types of investment(scope is determined by factors such as sector, stage, region, etc.) the fund would make] to lower risks.
Returns – VCs want to see larger returns than an angel investor and therefore are more likely to invest in growth-driven companies. They also want to see returns faster, so if you are looking to scale at speed, VCs are a great fit.
Angel investors are less concerned with a large return (although they still want to see one) and focus more on generally helping the business grow over time. It’s not about a quick return for them. This makes angel investors an amazing option for the business owner who wants to continue to drive a slower, steadier growth.
Size of Investment – According to Pitchbook, the median deal for early-stage VC investments in 2018 was $7M. The average angel investment is in the range of $300-500k.
These sizes, however, are just averages; you may be able to find an angel investor who is willing to invest $2M, or a VC that’s happy to invest just $25k. This is case-dependent but definitely hints towards reaching out to VCs for larger rounds of funding(>$1M). Since VC funds are typically much larger as they pool funds, they can afford to invest more in each company.
Due Diligence – Since angel investors generally invest small amounts and do so with their own money (only having to answer to themselves), the due diligence process can be much faster and not very tedious.
VCs will typically perform a very in-depth due diligence to make sure your company lines up with their investment thesis; they usually have a very formal process. They must do this to answer to their partners and investors. VCs don’t want to put a lot of money into an untested product or service, so expect a higher level of due diligence and many questions.
Finding the right investor for your business depends on the stage of your business and the factors mentioned above. Raising capital is a tedious process and consumes considerable time for founders.
Be sure to be prepared no matter what type of funding you seek or from whom; having a solid plan, especially for the use of funds, will come in handy, whether the funds come from a VC or an angel investor.