Looking for funds and wondering whether you should go for angel or VC funding? Well, if you have someone willing to invest in your startup it doesn’t really matter if it is a VC or an Angel, just take the money! More seriously, even though VC’s and BA share some similarities, you should be aware of their differences if or when you will be confronted to them.
Angels are taking bigger risks than VC’s
Angels are wealthy individuals who invest their own money in opposition to Vc’s who are investing limited partners money (ie someone elses’ money). Angels do not have to report to any investment committee, they take their investment decisions on their own. As such they are more willing to invest at a really early stage in pre-revenue companies and in some cases in pre-prototype companies. Vc’s will most of the time not consider investing in a company that is not generating revenues. So depending on your stage of development, one source of funding will appear to be more obvious than the other.
Angels tend to invest less than VC’s
Obviously, individuals have a more limited investment capacity than a fund. Angels investment tickets range between 20 K to 50 K. Even if business angels often co-invest with others, they are rarely present on investment rounds that are exceeding CHF 1 mio. Beyond that amount, you should privilege VC’s, (or small VC funds) as sometimes even CHF 1 mio is not significant enough for them to consider. You have to bear in mind that VC’s have at their disposal an envelope (sometimes a big one) that they have to invest in a specific period of time. Even if they have to diversify their portfolio, they often require a minimum deal size. It is physically impossible to be invested in small deals as they require the same time of analysis while they will logically have to close more of them in order to be on their budget. Below one million do not even lose your precious time in contacting VC’s , there is a 99% of chance that they will tell you to come back later when your funding need will be more substantial.
What if you need more than CHF 1 mio and no VC is willing to invest ?
Well in between you have some super angels: Ultra High Net Worth Individuals that have the willingness and ability to take larger positions than 99% of the habitant of this planet. They are either successful entrepreneurs that have made a fortune or just people that are realizing that startups can be a really lucrative investment. For Ashton Kutcher, Jay-Z or Justin Bieber and their Hollywood peers, startup investing is the new hype. Every week you can hear about celebrities investing in a tech business. For obvious reasons not everybody would have the chance to pitch on a red carpet, but targeting wealthy people can be a wise financing strategy .Not all of them are famous but it doesn’t mean they will be more accessible. However you can still try to approach some family offices which are often (not publicly though) looking for diversifying investments.
Two different investment philosophies
Angels want your success and Vc’s sees you only as return on investment. Yes I agree it is not that clear. Both investors are looking to optimize their portfolio return, but the fact that angels are investing their own money make them able to stand a longer investment horizon than VC’s. Basically the VC fund will have two periods, one during which they take their positions (making investments) and another period during which they will harvest the hard work they performed during the first period. During the harvesting, VC’s will be actively looking to minimize their losses and envisage any potential exits to do so. If they have to sell your company at discount just to get rid of it, they will. Angels tend to be more patient and to propose more friendly investment proposals (from an entrepreneur’s perspective).
These are the historical two main sources of funding, however the startup investment landscape is changing rapidly. Even if it is still at its infancy stage Equity crowdfunding is becoming a strong alternative to VC’s and Business Angels, but this would be the topic of another discussion.