Angels and VCs: a basic definition
Money is money, right? Well, for startups funding is a well-calculated necessity. Not all investments fit the needs of their goals. And, when you’re a new company, picking the right investor is a must. It saves time, money, and what you get in a possible exit.
If you’re new to the game, you must know that there key differences between angel investors and venture capitals, or VCs. From the amount of money invested and the round where they come in, to their exit strategy, angels and VCs work differently and help your startup in different ways.
What’s an angel investor?
Though the name might remind you of the holy guardians, an angel investor is someone who comes with a smaller investment, under $1 million, at the very beginning of your startup. It’s the money that helps gets you off the ground. Because the investment comes from an individual, is likely that it’ll be a one-time investment.
Family, friends, and even retired entrepreneurs could be angel investors. A key difference from VCs is that angels are individuals, even if the investor is part of an angel group. According to Investopedia, angel investors have to be accredited by the Securities Exchange Commission (SEC) and “to become an angel investor, one must have a minimum net worth of $1 million and an annual income of $200,000.”
Alicia Syrett, mentor to Parallel18, is the founder of Pantegrion, an angel investment firm. She’s also part of New York Angels, a firm where a hundred individuals provide funding for startups in New York City. These types of groups can be found at larger startups hubs. For startups outside large hubs, there’s Angel List and their local network.
When pitching to an angel investor, Syrett recommends “being able to clearly and instinctively saying what you do.” Founders shouldn’t use abstract ideas to sound larger life, but rather be able to sell their product to an investor in a concise way. Instead of “we change the way you bank”, more “we provide mobile solutions to street vendors with a small gadget.”
What’s a VC?
Venture capitals are professional investment managers. Unlike individual angel investors, VCs are comprised of a group of people who have to diversify and invest their clients money.
VCs invest in startups once they’re past the very first seed funding stage. There are many ways VCs become involved: they consult angel investors, go to demo days, they might even approach a startup that’s particularly interesting to them. There are exceptions to the norm, like when a well-known founder is creating a new company or the product.
Because VCs are professional money managers, they are more involved in the company, in guidance capacity. After all, they are looking to also have a return of their investment. The success of a VC is largely entangled to the success of their investments. It is also more likely that VCs invest in a few funding rounds, unlike the one-time deal from the angel investor.
Venture capitalist Doug Zingale has been in the industry for over two decades. On his latest talk with Parallel 18 Gen 3 startups, Zingale assured the group that the best course of action for founders is to understand the VC world. Per Zingale, the industry has become more standardized in the past decade, which makes it easier for a founder to adapt to the VC process.
For all its differences, angels and VCs share a bond. They’re both extremely important to the startup world, providing funding where crowd-funding and banking are neither enough nor ideal for the long run of a company. And, besides the much needed investment, angels and VCs provide something much bigger, as Zingale said in his talk, “validation by proxy”. Having a well-known angel or a respected VC backing your company gives your startup a better chance of becoming an interest of other investors.
