On venture capital (VC) vs angel investment:

The general rule is the more money any entity has to offer, the higher the return has to be for any investment. So angels put in smaller checks, but also aren’t accountable to a bunch of LPs for returns, so would be happy with some x return generally far smaller than a VC would be. (More funds to offer = more partners to be responsible to = higher returns needed to be generated in order to justify those partners not just putting the invested money into some other vehicle, like an index fund.)

Bigger funds also have more fiduciary obligations. For example, if you’re taking money from pension accounts like TIAA-CREF, you have to return at least that money, plus market rate return. It turns out you have to return a LOT more because of all the losses from most of the companies invested in — most companies receiving investment (maybe) break even or (often) fail outright. So with VCs, they will be (should be) much more rigorous in due diligence than any individual angel who is playing with their own money. Even early stage funds need to be scrupulous in delivering returns. The liability for poorly researched bets are generally just infinitely higher when you’re talking about losing someone else’s money.

Angels, on the other hand, write smaller checks, but can deal with average or just market rate returns (or outright loss) much better. Even angel groups tend to be comprised of groups of individuals who may share deal flow and even due diligence, but all members decide to invest independently, and the money comes from each individually rather than the group as a whole.

So, overall, who to approach depends on your needs, your market, and your stage. In my experience, angels are best when they are active — they are mentors, official or unofficial operators in your business, and lend expertise and connections in addition to money. Money is sort of the least of what you get from a great angel. You also get a warm introduction to other connections that move you forward in your company. So this is really for starting your company, when you need money but also a bazillion things more, and they can be flexible and take a bet on you rather than your performance. (A note on warm introductions: this is basically the core and currency of the VC world. A warm intro can get your foot in a door your amazing concept and fabulous resume can’t. In fact, this is the primary benefit of most of the top schools, and often top consulting/ legal/ accounting/ brokerage firms: the connection potential to other people with whom you can later do business. Meeting masters of the universe, masters in training, or just the kids of the wealthy is the backbone of the warm intro collective. If you want to know why these companies keep forming around the same people with the same backgrounds: this is why.)

VCs are great for scaling. Even early stage VCs are for post MVP (minimum viable product) — they want to see that the market is buying what your selling. They don’t care as much about how awesome your idea is or how big the overall market is (other than making sure its big enough for them to generate enough returns) — they want to know that YOU and YOUR COMPANY can capture (1) the opportunity, and (2) deliver enough returns on investment to make their LPs happier they bet on the VC than in an index fund or directly into a company themselves. (Investing directly increases your risk, but you get more for your money and don’t have to share as much upside.)

VCs like follow on raises — they want to you want more money. If it comes from them, it increases their position in your company, and their potential return on investment if you knock it it of the park. If the money comes from someone else, it reduces their risk and builds their branding with other investment groups (which builds reputation, adds to the likelihood of their investments becoming successful, and provides access to a new funnel of deal flow). Angels, on the other hand, like growth, but since the money will rarely come directly from them and they don’t get the same branding benefits, they care more about getting diluted to nothing by bigger money (getting Savarino-ed).

Angels and VCs will not only contribute differently to your company, but will pressure you to different outcomes. Say you get a $50 mil buyout offer. For the $150k angel investor, this is a total yes. Great! Probably a fantastic return, and everyone gets to move on. A VC who invested several million or more, on the other hand, wants you to turn the offer down and take the risk and work of shooting for a better return. Even if you don’t think you’ll get a better offer in the near future (or ever), or your spouse is sick and you could really use the money and time, or you or your partner’s fertility is reducing by second and you want to start a family now — VCs really don’t care. They need to generate a much higher return. Do you think the companies turning down a $4 billion offer were just playing chicken or going on a whim? Nope. Companies like Yahoo and Snap all had VCs pushing those deals — for good and bad. And it doesn’t often work out in favor of the decision to hold off. Unfortunately, it’s the CEO’s reputation that suffers most, and often doesn’t recover.

So, the upshot is: figure out your exit strategy, and work backward from there. How much money are you going to need to get to your exit point, and how much of that can be generated by revenue? Does your growth strategy require you to be cash flow positive? To gain control of an all-or-nothing marketplace? To incur regular capital intensive purchases? What do you need to get there?

I met with a VC recently who said angels and VCs are both assholes, but VCs are better at it. That’s true as a whole (but not necessarily individually). You won’t have your interests aligned with these people all of the time — good or bad — and you need to know how to negotiate those instances and make decisions.

Don’t raise money if you have to. Ever. It sucks up your time and karmic energy, and takes away from growing your business. Most companies are not good investments — even when they are great companies. And you don’t have to be a Fortune 50 company to be successful or to make an impact.

Be clear first in what you’re building, why you’re building it, and what your end point (if any) will look like. High growth companies are NOT only option. And often not the best option. Getting outside money doesn’t make your idea better, or more likely to succeed (yes, that’s actually true). And remember that adding investors is also adding more voices and opinions — one you don’t have the freedom to ignore.

Profit is rarely as important to outside money (especially VCs) as market share and cash out value. Most of the biggest winners in the VC space have been marketplaces, which are rarely cash flow positive, and, even at their peak, generate only a fraction of their user value in revenue because of the way marketplaces are built. Owning a marketplace is a risky proposition — even if you dominate the marketplace, you may not be able to generate revenue sufficient to cover costs, and may be forced to alienate your users by selling things like their private data (not naming names, but rhymes with Basebook). If you are then subsumed by a shifting or new marketplace, you may recoup NONE of your prior investment — that has happened. But it’s still what investors love, for many of reasons.

I’m a big believer in getting as much info as possible and being as realistic as possible about where you fit. You can make most things work, but not if you don’t have a full understanding of the financial ecosystem or your place in it.