What is the difference between angel investors vs. venture capitalists?
Angels and VCs are two of the most well-known funders of startups. How do they differ? What are their varying roles and investment criteria contrasted when it comes to funding?
If these staples aren’t a good fit for your startup, with other sources of capital are there to consider, and how do you land them?
The Ultimate Guide To Pitch Decks
Let’s find out…
This post talks to you in detail about angel investors and venture capitalists as valuable sources of funding. Before you read ahead about how they work, you may also need more information about the different types of investors for startups. Check out this video I have created that explains yoru sources in detail.
Here is the content that we will cover in this post. Let’s get started.
- 1. What Are Angel Investors?
- 2. Angel Groups
- 3. Why Angels Invest In Startups
- 4. What They Are Looking For In A Startup To Fund?
- 5. Outsized Returns
- 6. Bragging Rights
- 7. Great Ideas
- 8. Founders They Want To Succeed
- 9. How Do They Fit Into Your Capital Stack?
- 10. What Are Venture Capitalists?
- 11. Why They Invest In Startups
- 12. What They Are Looking For In A Startup To Fund
- 13. Market Size
- 14. Growth Rate
- 15. Team Strength & Experience
- 16. Exit Opportunities
- 17. How Do They Fit Into Your Capital Stack?
- 18. Running A Fundraising Process
- 19. Preparing For Your Fundraising Campaign
- 20. Pitching
- 21. Negotiating
- 22. Due Diligence
- 23. Closing
- 24. Other Sources Of Funding For Startups
- 25. Getting Help With Your Startup Fundriasing
- 26. Summary
What Are Angel Investors?
Angel investors are individual investors who invest in startups.
They are typically affluent individuals and accredited investors. How much they have to invest in a single startup can vary widely. As can their experience levels.
There are some well-known angel investors like Mark Cuban and Barbara Corcoran. Some are high-earning professionals in traditional careers just looking to put their money to work for them. Others are former startup founders themselves who have perhaps achieved a great exit.
There are technically millions of individuals out there who can be angel investors vs. venture capitalists.
See How I Can Help You With Your Fundraising Efforts
See How I Can Help You With Your Fundraising Efforts
Angel groups have been increasing in popularity as well. These are organized groups of angel investors.
By investing in a group they are able to find more deal flow, conduct better due diligence, and provide larger and more impactful amounts of funding, while reducing their individual exposure to risk.
There are a growing number of these groups seeking startup investments, and offering pitching opportunities.
Many are localized, or target more specific types of investments or sectors.
Why Angels Invest In Startups
There can be a variety of motivations that drive people to become angel investors and to invest in startup companies.
Diversification is one of the most important. They are looking for alternatives to older types of investments, like public stocks, bonds, real estate, and precious metals.
This type of direct investment also gives investors the feeling of having more control over their financial destiny, and not being stuck in highly manipulated markets.
The returns can clearly be attractive too. Successful startup investments can deliver some of the highest returns investors could hope to see.
There may also be tax benefits depending on how these investments are structured, and the vehicles through which they invest their capital.
FOMO (Fear Of Missing Out) is another big motivator in this space. No one wants to have passed on a great trend or new thing that is making their friends rich while they sit on the sidelines.
Giving back, and having a positive impact is another major decision point for angel investors. There are many things that they can invest in. Though finding new companies and ventures they believe can have a great impact on the world, and being able to give entrepreneurs a chance is what inspires many angels to choose to invest in startups versus other asset classes.
What They Are Looking For In A Startup To Fund?
As covered above, there can be a variety of motivators driving both, angel investors vs. venture capitalists. This also means they can have different priorities and investment criteria as well.
These are some of the most common scenarios you may encounter.
Most are looking for well above average returns in this space. They are not looking for what they can make in the property or public stock market. They want some home runs like they see others achieving.
Angels want to make investments that make them look smart and feel good. They want to be in the next hot thing. They want to be able to brag about their great investments at dinner with their friends and colleagues.
The idea is one of the few things startups have at the stage most angels are going to participate. They will be putting a lot of weight on the idea and vision. Especially when there are no historical financials to review.
This may be something that resonates with them personally. Like solving a problem or frustration that they have personally experienced and are passionate about.
Founders They Want To Succeed
Your other real asset in the early stages is your founding team. Angel investors want to back people that they like, think are capable, and could use the chance to do something exceptional in their lives.
How Do They Fit Into Your Capital Stack?
There are a variety of sources of funding that startups can leverage. Including both debt and equity financing. You don’t just raise once and are done. It is a process, or layers of a cake if you like. So, where do angel investors fit in?
Angels are typically involved in the earliest stages of startup funding.
They do not typically have the hundreds of millions, or billions of dollars to put into many different individual startup investments that big funds have.
So, you are much more likely to find them getting involved during pre-seed to seed rounds. Most will be tapped out by your Series A.
As already mentioned, you may find professional full-time angel investors and angel groups to pitch for larger funding amounts. Though, in many cases, you will find them through your personal network in the friends and family round stage. They may be your professors, old coworkers, mentors, bosses, or relatives of friends.
What Are Venture Capitalists?
Venture capital firms, or ‘VCs’ are probably the most famous source of funding for startup entrepreneurs. They are often the most desired target investors for first-time founders.
VC firms have now branched out far further afield than just Silicon Valley. Major VC firms have more presence around the globe. With new hubs popping up in other major international cities.
Venture capital firms are professional companies that focus on investing in businesses. They pool money together from their own investors. Typically referred to as ‘LPs’ (Limited Partners). Then they source, vet, negotiate, and investment deals through various funds they create.
Why They Invest In Startups
This is why they exist. They are in the business of capitalizing on business ventures.
It is a high risk, but very high return space, where they are playing with very big money.
VCs are looking for big home runs. Most of the startups they invest in may fail. So, they are shooting for 100x returns that will make up for all of those other losses, and enable them to return attractive yields to their own investors.
What They Are Looking For In A Startup To Fund
As we just mentioned, super high potential returns are the big thing. So, they will look to some of the following factors to gauge that potential.
One of the main criteria VCs look at is the size of the market you are taking on. It’s going to need to be worth billions, if not trillions, to be able to deliver on their desired returns.
The best predictor of future performance is past performance. So, investors are looking at how you’ve managed and maintained a very fast pace of growth.
Team Strength & Experience
To be able to manage this company to the size they are looking for; your team needs to have some business experience under its belt, in addition to technical skills and domain knowledge.
How are they going to get their cash and returns back out? Will it be further funding rounds? Will it be an M&A transaction, or taking the company public?
How Do They Fit Into Your Capital Stack?
While this is always in flux and the economy and trends shift, VCs are most likely to fit in during the middle funding stages.
More are participating earlier and later than they used to. Though, historically you’d find VCs funding startups from their Series A through Series C fundraising rounds.
Friends, family, and angel investors would come in earlier. With private equity and corporations coming in later.
Running A Fundraising Process
The process of raising from angel investors vs. venture capitalists isn’t all that different. Even though the depth of vetting and criteria they care about may differ a little, along with funding amounts, the steps are the same.
Preparing For Your Fundraising Campaign
The first step is preparation. You get ‘lucky’ when your preparation meets the opportunity.
Be sure your startup and all of your data, documents, and accounts are organized. Take the time to understand your most probable investors at this stage, and create a short list of those you will begin reaching out to build connections with.
Next, begin preparing all of your fundraising materials. 90% of this will be the same, regardless of whom you are going out to raise money from.
This includes your:
- Pitch deck
- Business plan
- Marketing plan
- Action plan
- Investor updates
- Virtual data room
- Financials and financial forecasts
You may be pitching in a variety of formats. You need to be ready for all of these mediums and initiatives.
- Your verbal live and online video pitch
- Pitching via Zoom
- Cold email pitches
- Social media outreach
- Pitching events
If you are successful in presenting your pitch and have survived a couple of rounds of meetings with your potential investors, then you hope to get a term sheet. This is a potential offer of funding, which lays out the proposed terms of the investment.
You will benefit from professional representation during these negotiations. There can be a lot of legal languages, and many clauses and provisions to decipher. You want to be sure you understand the future impacts of everything you are agreeing to.
Next, you will enter the due diligence phase in which your investors will comb through all of the claims you’ve made, and your data and documentation to validate it.
This can be a lengthy process. At least anticipate this to take several months. Though it can be as short as a few weeks, to over a year.
Once you pass through due diligence and have checked off all the required boxes and tasks, then the final investor agreement is signed, and money can finally be wired to your bank.
Keep in mind that in fundraising, storytelling is everything. In this regard, for a winning pitch deck to help you here, take a look at the template created by Silicon Valley legend, Peter Thiel (see it here) that I recently covered. Thiel was the first angel investor in Facebook with a $500K check that turned into more than $1 billion in cash.
Remember to unlock the pitch deck template that is being used by founders around the world to raise millions below.
Other Sources Of Funding For Startups
Angel investors vs. venture capitalists may be the most well-known types of capital for startups, but there are other methods of fundraising, and sources of funds.
- Business loans and leases for specific needs
- Business grants and prize money
- Startup accelerators and incubators
- Crowdfunding platforms
- Strategic corporate investors
- Private equity funds
Getting Help With Your Startup Fundriasing
Startup fundraising can be complicated. Absolutely everything is riding on it. There are many working parts to figure out and manage in a short period of time. All while trying to manage your business at a whole new peak level of performance.
You will need help. This can come in various forms. One that you should consider is enrolling the help of a fundraising advisor or consultant. They can help you prepare, make introductions, negotiate, and manage the transaction through closing.
You may also look to:
- Existing pitch deck templates
- Books on startup fundraising
- Podcasts with case studies of other successful fundraising campaigns
Fundraising will make or break your startup. There are many different methods of obtaining financing and capital. Each may have its own place in your capital stack.
Angel investors vs. venture capitalists are both a big part of this ecosystem. Each is slightly different and plays a different role in your funding journey.
You may find interesting as well our free library of business templates. There you will find every single template you will need when building and scaling your business completely for free. See it here.