For those of you looking to finance your startup, raising money is one of the most daunting tasks you'll ever face as an entrepreneur.
While you may understand the basic difference between angel investors and venture capitalists (VCs), you may not understand their similarities and differences enough, in order to pitch them effectively.
Building upon part one of this series, the following are seven key charateristics you should know about each investor type.
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1. They have different backgrounds.
VCs tend to have financial management or professional investment backgrounds. Angels tend to be former or current entrepreneurs.
While many VCs are former entrepreneurs, the majority of VCs come from an investment banking or financial management background, which influences the way they interact with and assess entrepreneurs.
Quantitative analysis of a product’s traction and its market will heavily influence a yes or no investment decision. Angels usually invest by leveraging their personal operating expertise as former entrepreneurs or business leaders. That background influences the types of industries they’ll consider and the individual entrepreneurs that inspire them.
2. They have different personal brands.
VCs are generally public personas. Angels are often behind the scenes.
VCs are in the business of deal flow. They want to hear about as many startups as they can. To fuel this, they must be public and accessible. They’ll be active on Twitter, Instagram and popular blogs in order to raise awareness among entrepreneurs. VCs need to be veritable celebrities among entrepreneurs.
Angels tend to be more private and harder to find because they don’t want to be inundated by deal flow.
For most angels, startup investing is a hobby that must be balanced with the rest of their obligations. If they’re too public, they’ll be bombarded by entrepreneurs seeking money. Sure, some angels will actively blog, Tweet or create an Angel List profile. But these people tend to be the most active investors.
Many angels aren’t digital natives, and the majority like peace and quiet; therefore, they won’t be easily found on social media. In some regions of the world, personal security is an additional component that urges angels to invest quietly. In these locations, if the public knows you are wealthy you become a target for crime.
3. They can both be jerks.
There are just as many bad angels as there are bad VCs. Surly personalities are rampant in the investment world, so entrepreneurs will have the inevitable task of navigating bad investors.
In any city or industry, there will be both great and terrible investors. Some VCs will clash or undermine your decisions as an entrepreneur - and sometimes they’re justified -- just like some angels will demand greater control or influence over your day-to-day than you should give.
4. They can both lead to bad deals in different ways.
Entrepreneurs end up with bad deals from angels because the angels don’t know any better. Entrepreneurs end up with bad deals from VCs because the entrepreneurs don’t know any better.
Most VCs won’t deliberately try for non-market deal terms because word gets out too quickly. If entrepreneurs learn you’re a greedy VC, they’ll gossip and discourage their peers from approaching you. VCs also have a better grasp of how other funds and firms will examine a startup in future rounds of financing. The VC wants to structure their investment in such a way that it does not discourage future investors.
It’s more common to hear about bad investment terms from angels. If this happens, it’s frequently because an angel doesn’t know market-standard terms and/or doesn’t understand how non-market terms hurt everyone involved. Savvier angels know they must be fair with the entrepreneur if the company is to succeed in the long-run.
5. They have different amounts of liquid cash on hand.
Money loses value if it’s not put to work; therefore, the money that angels and VCs invest is often invested elsewhere before it’s reallocated to a startup.
VCs generally don’t get 100 percent of their fund’s money upfront. Instead they must periodically issue capital calls to their limited partners (LPs), requesting their next tranche of money. Granted, since they are professionals, they will almost always have enough cash on hand to do their deal with you.
Angels, in turn, may need to rebalance their overall portfolio by selling some stocks in order to free up enough money to invest in your startup.
6. They have different impacts.
VCs are more likely to crush your company. Venture funds must produce venture returns for their LPs. In order to achieve this, at least one or two of their investments must provide huge returns. We’re talking 30 times or greater return on a given startup investment in order to counteract the fund’s bad investments - or failed startups. To do this, VCs encourage their startups to swing for the fences.
They push founders to spend big and take big, calculated risks if it has the potential to turn that startup into a unicorn. Since VCs are also more likely to take a board seat at your company - angels generally don’t take board seats and shouldn’t -- that reinforces their ability to influence your startup.
For the entrepreneur, this means that a VC might push you to take risks that might not be the wisest choice for you, your employees or your customers. If you’re considering whether or not to take venture capital, you must consider whether you want that extra pressure and whether an aggressive growth trajectory is right for you.
7. They are not equally diverse.
Angels are more diverse than VCs.
There is greater diversity in the global angel population than in the VC world. Whether that’s race, age, gender, geography, or experience, angels embody a wider gamut of backgrounds and perspectives.
VCs, in turn, are less diverse than Wall Street, and it’s predominantly centered around Silicon Valley.