You’re a founder and you need funding. Do you go to a VC? What about an angel investor? Both of these types of investors can play a role in funding startups, but there are some differences between them that are important to understand. As a first-time founder (or a founder who is first-time-to-fundraising) it can be difficult to determine which type of investor is right for your solution, how best to pitch them and when to pitch them. Here’s what you need to know about the top differences between angel investors and venture capitalists.
What is an Angel Investor?
Angel Investors are high net worth individuals who invest their own money in founders, startups and early-stage companies. The term “angel” comes from the “Angels” of Broadway, the wealthy individuals who would support performances by investing large sums of their own money.
Angel Investors: The Pros and Cons
Angel investors make their own investment decisions and don’t have to answer to other investors, partners or board members. Angel investors often invest in friends or family members who are starting a business. Due to the personal nature of these relationships, angel investors often bring their experience to the table as well, investing their time mentoring and guiding founders. For Steve MacDonald, founding MacDonald Ventures as an angel investor allowed him the opportunity to increase his deal flow, without giving up control or the ability to engage more deeply with his investments. Because these investments are risky, most angel investors restrict these types of investments to 10% of their investment portfolio.
I became an angel investor because I didn’t want to work for anyone else. I didn’t want the responsibility of managing someone else’s money, or a formal process. As an angel investor I have the agility and flexibility to invest in a streamlined way.
What is a Venture Capitalist?
Venture capitalists are also high net wealth individuals and private equity investors who choose to invest into a private fund managed by a VC firm. These VC funds are typically formed as a limited partnership with the partners investing into the fund. VCs are popular in the technology sector and have existed in the U.S. since the mid-1900s.
Venture Capitalists: The Pros and Cons
Venture capitalists invest in young, unproven companies, which is, in general, a risky investing space. Having a full-time team in their VC firm that is constantly assessing risk and researching the market can help mitigate some of that risk.
The VC firm may be making the investment decisions, but they are answering to a variety of stakeholders – namely, the wealthy individuals, insurance companies, foundations and corporate pension funds that invest the capital. VC’s also typically have more requirements for control of your company, such as requiring a seat on the board.
What Are The Key Differences And Similarities Between An Angel Investor And Venture Capitalists?
Venture capitalists and angel investors are similar in some ways, but differ in others, and founders should be strategic about why and when they choose to pitch these investors.
Similarities: Angel Investors vs Venture Capitalists
- Angel investors and Venture capitalists are usually wealthy individuals who invest their own money
- Angel investors and venture capitalists typically invest in early-stage companies and riskier investments, such as in tech
- Angel investors and venture capitalists bring their networks and expertise to the table, providing value beyond their financial investment
Differences: Angel Investors vs Venture Capitalists
- Angel investors invest directly and make the investing decisions
- Venture capitalists fund a professionally-managed fund, which then makes the investment decisions
- Angel investors will be more likely to invest in an earlier stage in a company’s life cycle
- Venture capitalists may have more requirements for funding, such as preferring a more seasoned founder or requiring a board seat
- Angel investments can start as low as $10k, whereas a VC fund usually starts at $1M
- Angel investors often are personally invested in the business and passionate about the product, leading them to provide mentorship and guidance to founders outside of capital investment
Pitching Deck To An Angel Investor Vs A Venture Capitalist
When and How To Land Funding From A Venture Capitalist
VCs are looking for a unicorn: a startup that will become a 1 billion dollar company. That’s why it pays off for them to participate in the risky investments of funding early-stage startups. To find that unicorn, they’re looking for a startup that has a strong product, a huge potential market and a team they can count on. VC’s will be more likely to be interested in a company if they have a seasoned industry veteran or founders at their helm who can point to prior success.
You don’t want to pitch a venture capitalist too early, so it’s important that a founder be confident in their product, the market opportunity and their people before pitching venture capitalists.
When and How To Land Funding From An Angel Investor
Angel investors are independent investors, so they have more freedom in who they are willing to fund and can be more open to early-stage investments. Because angel investors call the shots, they can be more flexible in their investment terms or invest in a company to help them grow and scale, versus with the goal of doubling or tripling their investment. That, of course, doesn’t mean they aren’t looking to secure great returns on their investment, they just may take into consideration their passion for the area or their belief in the individual founder over pure profit. If your company is in its very early stages, but you believe you have a big, bold idea that could change the world (and the team to back you up), you may want to consider pitching an angel investor.
Before pitching an angel investor, you’ll want to have a clear, well-executed elevator pitch, a comprehensive business plan and understanding of market demand for your product and an anticipated return on their investment. VC’s and angel investors are investing in you as well as your business, so you’ll also need to demonstrate how your background, expertise and personality position you for success.
Where To Find Angel Investors And Venture Capitalists
Angel investors are typically involved in entrepreneurial activities in their communities like business summits, startup showcases and networking events. Because Venture capitalists are typically more interested in companies with high-profit or high-value concepts, they’re likely to attend startup conferences and competitions. Startup platforms like AngelList offer founders the ability to network with VC’s, angel investors and syndicates, where startups.com provides a forum for founders to peer-network and share resources, including finding funding.
Who You Pitch (And When You Do It) Matters
The key to knowing whether to pitch an angel investor or a venture capitalist is understanding the stage of your business and your velocity of growth. If you have a fast-growing product, there is value in getting the brand name of a VC group, but, in order to gain access to a VC, the bar is higher, you’ll need to be further along. As a founder, especially one who has exhausted friends and family funding, you can get in a hurry to secure funding, but it’s important to take the time to step back and determine what stage your company is in, and how confident you are in your product, market demand and team before reaching out to potential investors. That said, if you’re a passionate tech founder with domain expertise, motivation, persistence and humility, learn more about Steve MacDonald and MacDonald Ventures.