VCs versus Angels

Being in business can be tough. But finding finance to fund your business can be even tougher. When you’ve exhausted the credit cards, the banks and even your family and friends, where do you go for more money?

Well, two well-known sources are angel investors and venture capitalists, otherwise known as angels and VCs. These two financial guardians are often sought out by entrepreneurs, especially those seeking money to either start up or expand their
business venture, because they tend to invest in areas where other financial institutions may fear to tread.

But what are the differences between the two? And how do you know who to go to when you reach the stage where you require further finance?

VCs vs Angels

Venture capitalists, who are arguably the better-known of the two, tend to be high-net-worth individuals or investment firms that invest significant amounts of money
in early-stage, high-potential, growth companies. They do it in order to generate a return through an eventual realization event such as an IPO or trade sale of the company. Investments are generally made as cash in exchange for shares in the invested company. They may use their own money or they may use funds that are sourced from other investors, but what distinguishes them from their angel counterparts is that they invest large sums of money, typically more than $1 million. They search for and fund businesses that show the potential to have enormous growth.

Venture capitalists are targeted most by new companies with limited operating history that are too small to raise capital in the public markets and are too immature to secure a bank loan. These companies approach VCs knowing that, unlike a bank or financial institution (or even a family member investing in a business) VCs will usually ask for – and get – significant control over company decisions, as well as a significant portion of the company’s ownership and future value.

Angels, on the other hand, tend to be affluent individuals who have made money – usually a lot of money – in a business venture of their own that they’ve built, created and then sold. They want to invest this money but more than that they want to help other entrepreneurs to achieve success and wealth – and hopefully pick up some of the profits in the process. Angels are happy investing in small companies because they require less capital. Angels can also have a more intimate relationship with the owners of the company (which equates to keeping an eye on the business).

Essentially, angels have less of a business interest but more of an emotional involvement. They’ll invest up to $1 million but rarely go above that. VCs, on the other hand, will offer big money but want big returns – at least three times their money back – and expect a share of the company – anywhere from a tenth to
a third.

VCs

Positives

• VCs will have anstitutional approach to it all.  They want to want to make money with a minimum of emotion.

• VCs will usually bring other resources to the partnership. Often the VC will give the investee access to relationships, research and other valuable things that can not be otherwise accessed.
• Experience. Most VCs have been through the investment and exit process many times before. They know the game. Angels might be doing it for the first time.

• Follow-on capital. In the event the business model does not hit its timetable the VC may be there with additional capital. If he/she is a good VC then they will bring an endorsement for the business model above and beyond an angel.

• Professional approach. The VC makes his/her money from your success, so it’s important to them.

Negatives

• The process can be a killer. Details of deals can take months to hammer as the VC will be restrained by its investment committee.

• Decisions can take longer and be more complex than with Angels. Reporting levels can be higher and more often. If it is an inexperienced VC,  they can become a bit report ‘happy’.

• If a VC does not get its IRR (investment return) he/she can become obstructive. The terms may be draconian. Expect long discussions on valuation, who gets their money out first and control mechanisms that will restrict management’s ability to act without the VC’s approval.

• VC team members might not be up to the grade of the directors / senior professionals. This can cause frustration with investees if they are saddled with the ‘B’ team. (A VC will generally not patrol the ‘seed’ stage.) 

Angels

 Positives

• An intimate relationship between investor and investee can develop, which may be beneficial. Entrepreneurs can directly access the knowledge of the Angel.
• Quick decision making. Terms can be more flexible, as they’re not institutionally constrained.
• An Angel cares. their money is on the line. Although this can also have a negative effect. 

• Networks. If you end up with an angel who brings with them a network it’s a great thing.
• Track record. If the angel has been a successful businessperson then they can endorse the business model as a result of their personal track record.

Negatives
• Bandwidth constraints. The angel may become busy with other things and may be become inaccessible – usually because being an Angel is not their main profession.

• Lose interest / become hostile.  Investees can suffer from the Angel’s “it was a good idea at the time” attitude.

• Tinkering. Angels may ‘tinker’ with the investee. (See above.)

• Lack of follow-on capital. In the event that the business plan does not go
according to plan the Angel might not have the capital to support. Angels can also sometimes be unrealistic about the exit process, as all eggs are in one basket,
so to speak.