I’m constantly asked whether startups should raise from angels or VCs if they have a choice at their early stages. That’s a question without an answer, it depends on your business plans, the amount of capital you need, the strategic value added by each party, etc. But there is a question that can be answered, sort of — which is easier to raise from?
Typically, the perspective among entrepreneurs has been that it is easier to raise from angels than VCs. I think this is true in some cases, not in others. So this blog post, coupled with the one to follow, will outline when each is “easier” to raise from, and why you’ll find difficulty/success with each category, so that you can begin to recognize patterns and make more informed decisions about your investor targeting based on the data you’re getting from your first few conversations. Hopefully one of these two blog posts will resonate with what you’re hearing, and help focus your efforts (assuming you’re an entrepreneur) on the party that’s likely to fund you today.
The key advantages to raising from angels are: 1) that they have the ability to move without checks and balances, and 2) they don’t need billion dollar exits to produce a strong return, and will therefore fund businesses with more modest goals. Most angels do not have a set process, or a set diligence checklist — if they want to do the deal they can do so, even if it’s “shooting from the hip.” It also doesn’t matter if the market is extremely large, just if they can make a rate of return comparable to the rest of their portfolio of investments.
Some of the most common reasons I’ve heard for reasons angels invest are:
1) Mission connection
2) Looking for a project to work on
3) Like the entrepreneur
4) Expertise in the sector
5) Looking to allocate capital
So the main takeaway here is that if you can find an angel or a group of them that are looking for something where they can be strategic and have asymmetric information, and add value to the business, you can pull a round together much more quickly than VCs could move, and with much less diligence/process. And you may have a better set of hands around you to help drive the business forward.