Angels vs VCs: How They Think, Part 2
For those looking to finance their startup, raising money is one of the most daunting tasks they’ll ever face as entrepreneurs. While many understand that angel investors and venture capitalists (VCs) exist, few understand their similarities and differences in order to pitch them effectively. Building upon Part 1 of this series, the following are some key characteristics you should know about these investor types.
A variation of this article originally appeared here on Entrepreneur Magazine.
VCs tend to have financial management or professional investment backgrounds. Angels tend to be former or current operators.
While many of the greatest VCs are former entrepreneurs themselves, a majority of VCs come from investment banking or financial management backgrounds. This background 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 will influence the types of industries they’ll consider and the individual entrepreneurs that inspire them.
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, their blog, etc in order to raise awareness of their brand among entrepreneurs. VCs need to be veritable celebrities among entrepreneurs.
Angels tend to be more private and hard 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 personal lives. If they’re too public, they’ll be bombarded by entrepreneurs seeking money. Sure, some angels will actively blog, tweet, or curate an Angellist profile and these people tend to be the most active investors. But many angels aren’t digital natives — and the majority like peace and quiet — so they won’t be easily found on social channels. 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.
There are just as many asshole angels as there are asshole VCs.
Surly personalities abound in the world of startup investing, and entrepreneurs have the unenviable 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.
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.
Neither angels nor VCs are likely sitting on a lot of liquid cash.
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% of their fund’s money upfront — instead they must periodically issue ‘capital calls’ to their LPs, requesting their next tranche of money (granted — since they’re professionals, they’ll 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 you.
VCs are more likely to ‘crush’ your company than angels.
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 money, you must consider whether you want that extra pressure and whether an aggressive growth trajectory is right for you.
Angels are more diverse than VCs.
There is greater diversity in the global angel population than in venture capital. Whether that’s race, age, gender, geography, or experience…angel investors embody a wider gamut of backgrounds and perspectives. Yes, there is still room for greater diversity of angels — but it’s better than VC.
Venture capital is less diverse than Wall Street. And it’s predominantly centered around Silicon Valley. You can decide whether you think that positions the venture community to accurately choose and support the startups that represent a diverse world’s needs of tomorrow.
All these startup investor characteristics and variations are something we study in-depth at Startup Angels. We research the motivations, mindsets, and personalities of aspiring angels, crowdfunders and LPs around the world so that we can help them find the right investment opportunities in the right places. Follow our investor research to stay up to date.