In my last post I covered the key differences between angel vs. VC investors, so now I’d like to go into detail about the advantages and disadvantages of the two. It’s important to not only understand the difference between these types of investors but also recognize which may be more advantageous to your startup, depending on your situation.
Advantages of Angel vs. VC Investors
One important advantage of Angel vs. VC investors are their sheer numbers. There are probably at least several hundred thousand angel investors in the US compared to approximately 1300 venture capital firms. So, angel investors are easier to find.
Angel investors may also have broader interests than venture capitalists, who tend to focus on proprietary high-technology investments. They may also be slightly less rigorous in their due diligence process. Depending on your situation, this all may work in your favor.
In my experience, most angel investors do not dig as deep in due diligence as venture capitalists do.
Another important potential advantage of angels is that they are the investor of choice for startups trying to raise smaller amounts from around $1 or $2 million. Most venture capital firms will not do deals that small.
There are Also Disadvantages to Angel Investors
Depending on your startup’s needs, there are also some disadvantages when it comes to angel vs. VC investors. Although individual angel investors can move quickly, most angel investments come from groups of angels, which usually require twenty or more of them to agree on a project. This requirement can lead to a lengthy and complicated due diligence process in which each angel investor has his interests, questions, risks, and issues to resolve. So, reaching a consensus can be difficult, especially if the product or technology is complicated.
Another potential disadvantage to consider is that angels are generally reluctant to invest in capital-intensive companies. Most angels expect to do one or two rounds of investment and then have a company acquired. They generally do not like dilution. Although there are examples where venture capital firms have made Series A or Series B investments in companies originally funded by angel investors. Still, I believe the top-tier VC funds rarely do this. They don’t like having twenty to thirty co-investors.
Also, while many angel investors have helped create just one or two successful companies, that experience is much less valuable than what you could glean from a venture capitalist who has served on over thirty boards of directors, for instance.
The Advantages of Venture Capitalists
When considering the advantages of angel vs. VC investors, it’s important to understand that VCs manage large amounts of money and can make initial investments above $10 Million. They can also follow with many tens of millions more if necessary. This will matter significantly depending on the needs of your startup, clearly.
Finally, an enormous advantage of venture capital firms–especially the top tier firms–is that the managing partners are usually seasoned CEOs with extensive experience. As mentioned earlier, they have often served on over thirty boards of directors and have excellent company-building skills. They are superb directors who can help companies with strategic advice, introductions to potential corporate partners, and introductions to resources like banks, investment, bankers, accountants, etc.
The Disadvantages of VCs for Some Startups
Although they have more access to capital and extensive experience, venture capitalists may negotiate a lower valuation for their investment in your company. Because they generally invest larger sums, they may own a larger portion of your company than angel investors.
Their assistance can be tremendous, but if management doesn’t meet its objectives or things don’t work out well, they may be aggressive in influencing decisions or bringing in new management. Also, some venture capital firms encourage their companies to partner with other companies in their portfolio, which is not always optimal from the company’s point of view. In other words, your startup may find themselves with less control. So this should be taken into consideration when it comes to the advantages and disadvantages of angel vs. VC investors.
Angel vs. VC: Choosing the Best Investor for Your Startup
When choosing the best type of investor for your startup, you should focus on the following:
- Angels are your best bet if your product and its underlying technology are relatively simple and you need $2 million or less.
- If your product is complicated or you need more than around $5 million to build your company, you should lean toward a top-tier venture capital fund.
While it is tempting to think of angel investors as simply small venture capitalists, this can lead to bad decisions. Venture Capitalists have larger bank accounts, but the difference in their value-added is not just quantitative. It is qualitative. They bring experience and contacts that are substantially more valuable than most angel investors. But the drawback is that it is more difficult to get their attention.
Hopefully this will help your startup make the most advantageous decisions when deciding between angel vs. VC investors. If you need guidance on crafting winning pitch decks that do catch the attention of VC investors, my new course provides everything you need to know.
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