Seeking Funding from Angel Investors vs Venture Capitalists

I was recently asked several questions by a reporter with regards to whether startups should seek funding from angel investors versus venture capitalists.

Below are my answers.

1. For a startup seeking funding, what are the advantages of going with an angel investor over a VC?

  • While there are only 1,000 active venture capital firms in the US, there are an estimated 12,417,040 accredited investor in the US, so there are tons more angel investors to find/choose from
  • Angel investors will fund nearly any type of company, while most VCs will only fund technology companies
  • VC generally want to see sales/traction, while Angels will invest in earlier stage companies
  • Angels generally give much more favorable valuations and take less equity per dollar invested than VCs
  • Getting funding from VCs is ultra-competitive; they see thousands of deals per year and fund < 1% of them; an angel investor might only see a handful of deals per year

2. Are there any disadvantages of seeking funding from angel investors?

Most angels can’t provide add-on capital. So, if you need additional funding you have to go out looking again. VCs generally have additional funding they can give you and/or connections/introductions to other VCs.

3. Can you offer any advice to startups that want to pitch angel investors?

The vast majority of angel investments take place within 50 miles of the angel investors’ home or office, so look locally.  Also, while VCs invest solely with an eye towards ROI, angels also consider other factors such as liking and wanting to support a worthy entrepreneur and ego (how good it might feel to tell their friends they’re an investor in company X).

So, there you have it.  Another good guideline is the amount of funding you are seeking. If you are seeking under $2 million in equity funding, you should seek angel investors. If over $2 million, and in the technology space, venture capitalists are usually the best bet.