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How do Angel investors and Venture investors differ?

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Topic Expert
Bruce Schechter
Title: Principal
Company: The Schechter Company, LLC
LinkedIn Profile
(Principal, The Schechter Company, LLC) |

The obvious primary difference is in the size of the typical round funded:
- Angels will typically fund a round in the range of $100K-$1M
- VCs will fund at least $1M, although they prefer $2-3M and up.

Angels tend to invest as a group, with several individuals (3-10) joining together to fund a round. The challenge of raising money from Angels is that the entrepreneur must sell each and every investor who participates, so there can be quite a bit of individual interactions involved.

With a VC firm, an individual partner will take the lead early in the discussion, although generally a majority or sometimes unanimous agreement among the partners in the firm will be required before they proceed in funding.

On average, the level of detail involved in due diligence by a VC firm will be much deeper than with an Angel individual or Angel group.

In most cases these days, a tech startup will need to raise some level of Angel funding to demonstrate a degree of traction before VCs are willing be willing to step in. The exceptions are startups with rockstar teams (who have proven track records with specific VCs).

If you have more specific questions about the differences, please post a comment and we can do our best to clarify.

Achaessa James
Title: Product Manager
Company: National Center for Employee Ownership
(Product Manager, National Center for Employee Ownership) |

Bruce's list is an excellent start. I have a couple other *soft* differences worth mentioning:

1. Company Stage. In general, Angel investors are much more interested in very new companies. This puts into perspective the difference between Start-Up (Angel funding target) and Early Stage (VC funding target). Angel groups, such as the Seattle Alliance of Angels, have assembled educational and developmental tools that they make available to new companies to assist them in growing as a business and assist the founders in growing as executives. Angel groups also hold events that give start-ups the opportunity to pitch to investors and to polish their pitching skills. If Angel investors take a seat on the board, it is usually to mentor the founders and teach them how to be good board members by example. The Angel community is very much a *community* focused on supporting the company founders to achieve their business goals. Many Angels have close ties to the VC community and serve as good connectors when the company matures to the point where VC funds are necessary/desireable.

With VC firms, the company is expected to have demonstrated a certain level of busines and professional proficiency. A VC firm will negotiate a controlling position on the company's board and if the founders don't meet expectations in executive-level positions, they will be replaced by reassignment or termination. VCs are focused on the company's exit strategy (e.g., IPO, acquisition, merger) and generally have a 2-4 year (maybe now 3-5 year) runway to get the company positioned for that liquidity event.

2. Investment Goal. While the above may sound harsh, an understanding of the very different investment trajectories of Angels and VCs will bring clarity. Angel investors are usually investing their own money for their own benefit. They personally believe in the product or the founder and like the ability to participate in the company's growth in a relatively direct way. They are only responsible to themselves if the investment goes bad.

By contrast, VC firms raise their funds from among constituents known as "institutional investors." Institutional investors include large trust funds, university trusts, government investment divisions, large corporations, and so on. Thus, unlike Angel investors, VCs are not investing their own money and if the investment fails to produce a return they will have to explain to their own investors what happened. The success of your company will also have a bearing on how easily the VCs can raise money for their next investment fund because it will be a demonstration of their ability to select good investments.

So think of it from the perspective of your company's development:
Stage 1 (Seed) - A new company begins with Friends and Family as investors and sometimes Angels will invest at this stage, too. This is where you start your company and state your business case. You tell folks that you know and trust about your idea and they support you simply because they trust and/or love you. From a relationship perspective, this is like primary school - it's about people close to you.

Stage 2 (Start Up) - By this stage you've maxed out your credit cards and the goodwill or pocketbooks of your friends and family. Your business shows some promise, you have demonstrated proof of concept, but it hasn't gained any major traction. The Angel investors at this stage will get you focused on getting sales and push you to sell beyond your capacity to produce (that's actually a good thing at this point). From a relationship perspective, this is like high school - it's about people with more experience than you who are willing to teach you and watch you grow.

Stage 3 (Early Stage) - when you need capital to deliver on the sales you've already made, that's when VCs will have most interest in investing in your company. From a relationship perspective, this is like grad school - it's about meeting the expectations of a group of people who have given you the tools to succed and expect you to succeed because your success will reflect well on them.

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