Not much difference between angel investors and VCs anymore

invest, investing, investor
This entry is part 9 of 11 in the series Closing the deal
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Warren BergenThe start-up is going well and now it’s time to pursue capital. The friends and family networks are running thin. Who are you going to call?

Angel groups exist across the country and there are VCs (venture capitalists) you might want to see. The rule of thumb is to call them all: both angels and VCs are relatively easy to reach. Raising money is generally a long and difficult process, so don’t limit your options.

That being said, you should be aware of some differences. While there are variances, a participating angel usually makes a quick decision, but getting enough of them to make “quick” decisions to get in on the investment round will take time. The individual investment amounts will be smaller than a single investment from a VC and you’ll rack up a list of investors before the round is done. Some of them will insist on sitting on the board, while others will want to remain passive. Some angel investors still invest without a lot of due diligence, but that practice is beginning to diminish. After repeatedly losing their entire investment, often those who stubbornly remain interested in early-stage investing now take due diligence as seriously as any VC.

Click here to downloadAll VCs advertise that their value-added component makes their investment much more than capital. The trick is to find out which ones actually carry through with this commitment. This is quite easy to do. Simply look up their portfolio companies (usually listed on their website) and call them. Here’s a tip: if the VC only has three or four general partners and 60 companies in the active portfolio, their attention is split very thinly across a large number of companies. Do the math: How much attention are you likely to get? Many angel investors can bring value and can be checked out as well; however, very few angels are full-time investors so they won’t spend a lot of time working on your business.

Before you call the VCs, be honest with yourself about the scalability of your business. If your technology has major disruption potential for large markets, VCs and angels should all see what you’re doing. Smaller opportunities and lifestyle businesses that won’t get any traction with VCs can make very nice angel investments as long as there is a good growth model and an exit plan.

Exits are where things differ somewhat. There is some evidence to suggest that VC-sponsored companies have much longer exit cycles. As every investor wants every investment to be successful, angels are not calculating the returns your company produces against other investments as part of their decision to agree to sell when an offer comes along. VCs invest from a fund that needs to produce a positive result overall, and only a small number of companies of the entire group are going to produce a great return. As their fund ages toward the end of its 10-year term, they will have given up on some, hold little hope for others and look to you to produce enough upside to make the entire fund profitable. This may mean that they’ll extend the term of their fund so that you’ll keep growing the company to a stage that makes the exit big enough to make their number. You might have wanted to exit earlier but now can’t. This isn’t necessarily a bad thing. It’s just one of the differences you’ll have to live with when you choose your capital.

If you think it’s too early to pitch any investor, get a meeting anyway and begin a relationship. Explain you’re not there for the money but that you plan to return when you’re ready. Trust me; they will find that refreshing. Then, with their permission, send them quarterly updates of your progress. Don’t underestimate the power of relationships when seeking capital. Getting to know each other is a big part of the process and if you can manage to get that done ahead of the ask, you’ll be in a much better position when it is time to get the capital, regardless of source.

The stage of company development used to separate the angels and VCs more than it does now. Angels have been trending to post-commercialized companies in recent years and crowding into the VC space.

Then, there are the super angel investors who take down the entire round by themselves. While these are often difficult to track down, they are more common than you might expect. The rise of the angel group has only taken place within the last 15 years, and there are now hundreds of them across North America. Some of these groups have become quite professional. They’ll provide coaching to entrepreneurs and set up good screening processes. They’ll host training programs for the investors and undertake thorough due diligence.

The differences between angels and VCs used to be vast, but the variances are no longer quite so clearly visible as they have been slowly and steadily changing.

Warren Bergen is President of Alberta-based AVAC Ltd. and author of Swagger & Sweat, A Start-up Capital Boot Camp.

Warren is a Troy Media Thought Leader. For interview requests, click here.

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By Warren Bergen

Warren Bergen is President of Alberta-based AVAC Ltd.