Difference between angel investing and venture capital
Angel investing has nothing to do with venture capital investing. It’s like bringing a fishing rod to the forest for hunting bears. So far I talked with about 100 senior partners from various venture capital fonds from continents around the world. I also talked with around 100 angel investors (also from around the world). I also talked to probably more than 100 startup founders about their fundraising strategies, and how they saw angels and VC’s. There are distinctive differences that I would like to share.
Angels invest in passionate entrepreneurs
VC’s look for passion. However, if you don’t have other ingredients they are looking for, you will get a «negative answer». (I will explain this later). Why passion? Passion and burning desire to solve a certain problem are critical at the start of the project. Passion starts the process of turning the idea into company. I’ve talked with a lot of people who had ideas but it always remains in that stage.
When you have your regular dose of “catastrophic multi engine failure” passion gets you up from the floor. How to grow passion? Well you don’t, you find it. Usually it has to do with something that you love. You can understand this through a thinking process. For example my passion is getting other people to profit from using the power of the Internet. It’s a combination of altruism, technology and economy. I am also passionate about entrepreneurship, domains, hosting, and web sites.
Angels invest in people, VC’s say they invest in people
Angels were entrepreneurs at some point, and they understand founder’s pain. There’s a genuine wish to help the entrepreneur. There’s a big difference in investing $20k or $1M. When an angel invests $20k he doesn’t necessarily expect a 5X or a 10X return. A VC on the other hand invests for the sole purpose of getting that 5X or 10X return. It’s all about X returns and revenue to them. In many cases a VC invest with an expectation that 9 out of 10 will fail, and the 10 will give them a «home run».
Home run means it will pay for the 9 failed startups, the yacht, couple new startups and who knows what not. When you talk to a VC, he wants to know if your company can be sold for $100M in 6 years. I’ve never heard an angel investor speak like that. This probably gives you a clue whether you should look for angel or venture capital.
There’s no negative answer from an investor. First of all, you have to have one thing in mind constantly. An investor is not some all knowing all powerful being. Just because he made some money, and now invests or managed to get other’s money to invest it doesn’t mean he is right.
Bessemer ventures had over 100 IPO’s, and here you can take a look at Bessemer anti portfolio. These guys missed Google, Apple and Paypal. If they didn’t see that coming… Sean Parker raised $33.5 million for Airtime and it never took off. Bill Nguyen raised $40 million for Color and it tanked. So to all you startup co-founders that have trouble getting the funded, and you read news about startups that get funded… It doesn’t mean anything.
Getting an investment is never a sign that one project is better than other. (OK, in some obvious cases it is, but the point remains). To sum it up. If an investor says your project sucks, get the hell out of my office. That’s OK. If an investor says, your project is awesome, here’s the money. That’s OK. If that’s all the same, then what does it come down to? Well aren’t you a schmuck if you have to ask that. It’s about solving someones problem and getting shit done. Read this last sentence 3 times because I have nothing else to add.
[EDIT 22nd, August, 2014] If you liked this blog post, perhaps you will like the ebook]