I must hear it every day. Should you raise your seed round with a few Business Angels (BAs) or should you raise with a Venture Capital Seed fund?
I am obviously biased since I work for a VC fund, but I once raised money from Business Angels as an entrepreneur, so let’s summarize the pros and cons of each.
- ⌛ Process typically quicker. Can be convinced and committed in one meeting.
- 👔 Due diligence easier (if any). The BA often bases its decision on the entrepreneur or another Business Angel.
- 💰 Money wired faster. BAs have fewer legal restrictions than funds.
- 👔 Due diligence often too light — do the BAs really understand the pain point and therefore can they really help you?
- 💳 BAs typically cannot lead a Series A round and the team will need to go on the road again to find a lead. Fundraising process (Seed + Series A) might take longer in the long run.
Venture Capital Seed Fund
- 🧱 Fund will bring a need to structure financials, accounting, and reporting. These habits will prevent future errors and prepare company for future fundraising.
- 😎 Fund brings notoriety (previous deals, investment directors, existing LPs, media connection) to deal. Could create a virtuous circle around startup.
- 🤑 Assuming good numbers, future fundraising have became just a bit easier. A Series A fund will see another VC fund having vetted the company 18 months ago as a plus. Brownie points when the seed fund decides to reinvest.
- 🕰️ Process often takes longer. Verify with other portfolio companies.
- ✒️ The fund’s legal obligations (with financial authorities) create additional work for you as an entrepreneur with regards to reporting.
- 😠 Your new partner (the investor) is often more exigeant than a BA. Also he’s likely more influential with regards to the fundraising space.
So which one should you pick?
There really isn’t a right or wrong question. It depends on your company’s situation, your objectives, and your metrics.
Business Angels might be more appropriate if the business remains quite risky and VCs might make more sense if you expect some heavy capital needs in the short term future. If your cap table is a bit broken, Business Angels are less regarding and if your project is a little too crazy for VCs, Business Angels can be more adventurous.
Good luck! Email me (firstname.lastname@example.org) or LinkedIn if you have additional questions.
This story is published in Entrepreneurial Resolutions, where startups and venture capital funds can share best practices and exchange feedback.
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