The Real Deal

VC vs. Angel Investing

By February 27, 2017 No Comments

Many of the conversations I’m involved with lately revolve around the differences between angel investing and venture capital investing.  The issue outside of Silicon Valley has been blurred a bit because the check size for an established angel group and a micro-VC like Valor are roughly equivalent. The other stuff that gets hashed over coffee and cocktails–about angel investing vs. venture being good or bad?–just isn’t the right question or a useful answer.

My favorite type of capital for a startup is customer capital.

If you need more money to launch your startup (entrepreneur), or you want to differentiate your returns (investor), there’s no big picture “good or bad” in a moral sense. There’s what works for you and gets you where you need to go. Fortunately for investors and entrepreneurs a like, there are a lot of options out there.

So if the check size is about same, isn’t it about the same?

Not at all. Here are a few quick differences–

Angel investors typically . . .

  1. Use convertible notes, which make interest for them, between 4% and 10%.
  2. Intend to closely mentor a few entrepreneurs at a time.
  3. Tend to be rewarded with the return rate they’re getting on the note and don’t “feel a clock ticking.”
  4. Do diligence in a highly personal way–relying a great deal on interviews of the founder and any first customers. (I say this only from reviewing deal packages from a  number of angel groups–they tend to be text not spreadsheet.)
  5. Are willing to invest in a variety of types of companies, like product, service and software, as long as it suits their particular interests.
  6. Make decisions about their own money. At the end of the day, when an angel commits capital, it’s their capital.

VC investors typically . . .

  1. Use a priced round, meaning they have a definite price in mind for the value of the company, even if it’s best estimate.
  2. Intend to work professionally and directly with founders, and also rely on rhythms like board meetings, reports,  and corporate governance to structure the relationship.
  3. Have a timeline on the investment tied into their fund lifecycle. Their clock is ticking on making you more successful.
  4. Do diligence in a structured way–and that structure varies by firm. I see more spreadsheets, comparables and financials from VCs. Text–not so much.
  5. Pursue a fairly narrow investment focus, such as “software” at a certain stage of the business. This is because they have a confidence they can create outperformance in a narrow range of reality. A VC is betting on you, and also on themselves to meaningfully help you win.
  6. Make decisions about mostly investing other people’s money, mixed in with some of their own. (There are also corporate VCs and family office investing arms called VC that have variations on this theme. Some angels call themselves VCs too. Real VCs have LPs and a strict fund by fund timeline.) When a VC firm commits capital, they are reporting on the success (or failure) of that decision on a quarterly basis for years to come.

What have you noticed about the differences between angel investing and VC?