A question I get asked a lot from startups is WHO they should raise money from. In the early stages of fundraising, founders often face a decision of taking money from individuals (often referred to as angel investors) or venture capital firms. Both of these funding options have their advantages and disadvantages. Let's take a look at some of the major differences between angel investors and venture capitalists so you can make the most informed decision possible.
Venture Capital: Giving a Lot to Get a Lot
We have talked a lot about early stage venture capital before. Typically these firms write initial checks of $500K to $2M. They also usually require a 20%-40% ownership stake in your company and might include terms like a board seat. Giving up over a third of your company may seem crazy, but the big benefit is that most early stage venture capital will help you actually run your business. They may facilitate meetings with potential customers or help you set up a strategic partnership. They will also likely connect you with your next round of investors (Series A) once you have grown your business and need more money. This is typically referred to as ACTIVE money. Venture Capitalists will work with you to help you succeed (the good ones at least). The initial check size from a Venture Capital firm is usually higher than what you can get from angel investors. However, the larger check usually means a lower valuation, more equity, and less autonomy if you are giving up a board seat. Are you willing to take those tradeoffs?
Angel Investors: The Golden Carrot of Autonomy
On the other end of the spectrum, you have angel investors. These are typically high net worth individuals looking to make investments into startups. Although groups of angels in a network can come together to write larger checks, the typical individual angel investment is much smaller than what you could get from a venture capital firm and is usually in the $10K - $50K range. So what is the benefit of taking less money? AUTONOMY. Angel investors are typically hands off. You won't have to give up a board seat or get their approval on strategic decisions. Since, angels aren't actively working for your business, they can offer a higher valuation for their money and require less of an equity stake. The major drawback is that you don't get the same levels of help in growing your business. This is referred to as PASSIVE money. Angels will give you their investment and let you run the show. The graphic below shows some of the major differences between angel investors and venture capital firms:
Summary
Angel investors offer passive money. This is accompanied with higher valuations, less equity ownership, and smaller checks. On the other hand, venture capitalists offer active money. This is accompanied with lower valuations, more equity ownership, and larger checks. So which one should you pick? In order to answer that, ask yourself two questions:
How much money do you need?
How much help do you need?
If you need a larger check then you are stuck with venture capital firms, plain and simple. However, if you think you can get away with taking less money then you need to ask yourself how much assistance you are going to need in growing your business. Do you already have connections with potential customers and partners or are you trying to get your foot in the door? Have you already scaled a previous business successfully or are you flying blind? If you are a first time founder with little connections it's probably best to go the Venture Capital route. However, if you are a serial entrepreneur in need of just a little bit of starter cash, angel investments can be very attractive.
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