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Angels vs VCs: A Primer on How They Think, Part 1

Understanding investor motivations and mindsets.

Angel money or venture capital? A frequent question many entrepreneurs face when navigating the financing needs of their startup company. The reality is these two investor types think quite differently. Understanding their motivations is imperative if you are to make it through the fundraising minefield and bridge the fiscal valley of death.

A variation of this article originally appeared here on Entrepreneur Magazine.

Whether you’re a potential angle trying to understand where you fit in, or a startup trying to better network and pitch effectively, there’s a number of distinctions between these two characters to keep in mind:

Angels invest their own money and time. Venture capitalists (VCs) are professional investors who get paid regardless of what happens (they take a salary from a portion of their funds raised). This means that the emotional quotient is typically much higher with angels — they’re more bought in to the entrepreneur, the vision, the team. VCs are running a business and have a fiduciary duty to their Limited Partners (LPs). Yes, VCs can earn a lot of money over time if they pick successfully, but this is just an incentive.

Angels have skin in the game, while VCs may or may not. It’s rare that a General Partner (GP) personally contributes more than 5% to the total assets in a given venture fund. It’s typically closer to one percent. Angels, in turn, invest 100% of their own money. As a result, they’re often more interested in your success and more willing to do some heavy lifting in times of need. The downside is, when things go poorly, they’re more likely to get emotional.

Angels invest their own money. VCs invest other people’s money. For angels, a startup investment is a component of their overall investment portfolio. The portfolio can include stocks, bonds, real estate, commodities, art, and anything else they think will drive returns or mitigate risk and volatility. While some angels will put a high amount of their personal net worth into startups, the majority will only allocate a small percent of their wealth to startups (10% or less). As an entrepreneur, you should understand that an angel’s investment in you is the riskiest investment in their portfolio.

VCs believe they can ‘pattern match.’ Many think they can look in a rear view mirror of historical IPOs and acquisitions in order to achieve future success. They believe they can leverage information asymmetry to pick winners. And in some cases, this may be true. VCs build their fund by telling their LPs ‘I see more, better investment opportunities than you, and I have the expertise to pick the best ones.’ Some call this perspective ‘artisanal investing’, as if startup investing were similar to producing a fine wine or cheese. The reality is that venture capital goes to less than one percent of startups and frequently underperforms the stock market.

Angels have a variety of motivations that drive why they invest. Yes, all angels want to make money. But there are quicker, faster ways to get rich, so there is almost always another component that drives their activity as angel. As an entrepreneur, if you can pinpoint an angel’s motivations, you’ll be better positioned to successfully pitch them and assess whether you want them as an investor in your company. The most common motivations we see are:

  • They’re former entrepreneurs and want to ‘pay it forward.’
  • They love their city and want to help spur its economic future through technology investments. These investors will generally stick to doing deals in their backyard.
  • They’re inspired by a particular cause or societal need. If this is the case, they’ll often choose investments that try to solve those issues.
  • They want to stay involved with their industry / sector where they made their career. For these people, it’s exciting to see their industry be disrupted, and fulfilling to be a part of that disruption.
  • Their friends invest, so they think it’s cool to be an angel. Some of these investors have earned themselves the derogatory name ‘country club angel.’
  • They’re bored and they want a challenge.

For further insight into angel motivations, Josh Maher’s book Startup Wealth combines dozens of angel interviews on this subject.

VCs have one primary motivation that drives their investments: fiduciary duty to their LPs. Venture funds are always predicated on some form of ‘investment thesis’ that they sold to their LPs when raising that fund. Accordingly, they should stick pretty close to this thesis when choosing investments. These theses range widely: some are built on a geographic focus; some focus on a particular business model or industry (like SaaS, marketplaces, fintech, health care, etc); others are guided by more loose tenets like ‘market potential’ or ‘quality of founding team.’

Clearly, while angels and VCs often must co-exist on a cap table with each other, many differ significantly in the way they think and choose their investments. In Part 2, we’ll dive further into the motivations and mindsets of angel and venture capital investors.