Should I Find an Angel Investor or a Venture Capital Fund?

When your business is ready to raise capital, you have a significant consideration to make—should you seek an angel investor or pursue venture capital funding? 

Your fundraising budget, business model, and financial needs will likely all dictate your approach to the angel investor vs. venture capital debate. But before you make a decision and craft a capital raise plan, review our guide to all things angel investors and venture capital.

All About Angel Investors

Angel investors use their personal capital to fund promising businesses in exchange for a performance-related financial reward. Some common exchanges for angel investor capital include:

• Shares of the business, which can constitute partial ownership
• Royalties for products and services sold
• Dividends of business profits (without a payment obligation in the event of a loss)

As the relationship only involves private parties, there are fewer restrictions on the partnership’s exchange details. 

Who are Angel Investors?

Angels investors come in all shapes and sizes, and while anyone can be a potential angel investor, they are most commonly:

• C-level executives (past or present) with startup or business development experience
• Affluent investors who support growing businesses as a personal pastime
• Successful small business owners who have created successful brands in the past
• Crowdfunding platform supporters who invest small amounts as a group

When considering angel investors, be sure to research their background and other projects they have been involved with. You want to find someone whose partnership will extend beyond a solely monetary relationship—with networking assistance, for example.

Benefits of Angel Investors

Successfully securing an angel investor provides some significant advantages:

• Access to expertise – Angel investors with experience growing a new or small business are uniquely qualified to help your brand grow—they offer financial support and valuable advice.
• Limited investor pool – Businesses typically only accept investments from one (or very few) angel investors at a time. So, they are not beholden to the influence of a larger team when making critical operational or financial decisions.
• Grassroots potential – Raising capital via crowdfunding can anoint companies with a grassroots or progressive image. It is still a relatively recent fundraising method that democratizes financial support and may resonate with people’s values.

Angel investors can provide more than just financial support and potentially contribute to your business success via expert advice, reduced risk of micromanagement, and favorable optics. 

Drawbacks of Angel Investors

Every capital raise solution has its drawbacks, and angel investors are no exception:

• Not all angel investors are accredited. Accredited investors prove their financial security to the Securities and Exchange Commission (SEC). As a result, they can cut through some regulatory red tape (e.g., reporting investment amounts and dividends to the SEC). Using an accredited investor can streamline the investment process, but not every potential angel investor will meet that criteria.
• Angel investors may be under the impression that they are entitled to more nuanced investor agreements. Their investment of private funds and their status as (potentially) the only investor may embolden them to ask for a highly customized contract—creating such an agreement can increase the negotiations timeline, the time spent waiting for your first check, or both.

Be sure to thoroughly research and review before signing a contract with an angel investor to make sure they will provide a beneficial partnership.

Exploring Venture Capital

Venture capitalists (VCs) fund growing businesses via organized firms. While they provide funding in exchange for financial rewards (just like angel investors), VC firms operate as institutions, while angel investors are usually individuals. 

VCs generally operate on a tier-based system, providing funds in a series:

• Series A – Series A funding is the first investment VC firms make in a business. Series A funding is typically used for early infrastructure investments and provides working capital for early operations and development. 
• Series B – Series B funding typically provides businesses with capital to grow out of the development phase (which is usually funded by Series A). Series B investments are typically larger because recipients must prove their success and responsible use of Series A funding to receive a second round.
• Series C – Series C funding has two general purposes—preparing growing companies for an initial public offering (IPO) or increasing their appeal with acquisition aspirations. Series C investors typically support companies that already have a significant market presence and demonstrable past success.

Advantages of Venture Capital Funds

Seeking VC funding can be advantageous for businesses because:

• VC firms are experienced and accredited
• VCs provide structure and operational oversight to methodically grow businesses
• VC funding provides the potential for long-term investments via multiple series

While some angel investors are experienced business owners or industry experts, companies accepting angel investor funding do not always receive funding from these types of investors.
Since VC firms are usually partnered with entire portfolios of businesses in various stages, they apply their procedural methods to growth—structures that can be particularly beneficial for first-time business owners or innovators.

VCs are prepared to support businesses—as long as they successfully navigate Series A—throughout their entire development since they typically have more money to play with. They often invest throughout a company’s lifecycle to continue reaping financial rewards.

Disadvantages of Venture Capital Funds

Seeking VC investment comes with one significant drawback compared to angel investors—you are unlikely to receive Series A funding without thoroughly fleshed-out business plans, nuanced infrastructure goals, and a truly great idea. 

While angel investors may be more easily convinced to risk their personal funds for a startup they believe in, VC firms typically operate on cold, hard facts and well-defended potential. 

These demands for documented success and future goals are even more rigorous when pursuing additional funding series. VCs have money to invest because of the financial rewards provided by their portfolio companies—thus, they are less tolerant of nebulous ideas and prefer to fund companies with clear objectives. 

Angel Investor vs. Venture Capital: Which is Right for Your Business?

You should pursue angel investors or VC funding depending on the following factors:

• Company stage – While VC firms typically provide Series A to businesses beginning to scale, angel investors may feel compelled to provide support in any phase.
• Industry – VC firms generally prefer to invest in companies that can provide as many performance metrics as possible (e.g., app downloads, executed contracts, or employee performance data). But, your ability to provide hard performance numbers may vary based on your industry.
• Brand philosophy – Some businesses prefer to work with an individual over an institution. Some companies may want access to expert advice, while others seek to avoid oversight. Your specific brand philosophy will significantly impact which choice is right for you.