Angel Investors and Venture Capitalists

An angel invests his or her own money, where a venture capitalist invests other people’s money.


The interesting thing about angels and VCs is that angel investing long preceded venture capitalism. The first angel investment I’m really familiar with is Cyrus Field pulling together a group of angel investors in the mid-nineteenth century New York to help finance the laying of the transatlantic telegraph cable. But what really launched angel investing into the popular imagination, paradoxically, is the invention of venture capital because venture capitalists provided the kind of big capital and expertise to help start businesses that really made a huge difference in the American landscape, and hence the success of this first generation of Silicon Valley startups begat many individuals who are wealthy with technical experience and with business success. And those individuals then either went out to start their next company, or some began to look for places to invest. And these angels started to play a role in the food chain. In the 1990s we saw the phenomena of the venture capitalists raising ever larger funds, which meant that there was a gap that was created for an entrepreneur trying to raise $500,000 or a million dollars. That gap was quickly filled by angels who were banding together, getting into a group, to make aggregate investments that would add up to a million dollars. The group that I help coordinate, the Band of Angels, was the first here in the Silicon Valley and arguably one of the first in the country. Other angel groups formed in LA, in Boston, around the country; and today, there are more than 300. There’s even a trade association of angel groups. And time has proven that far from being a phenomenon of the dot-com boom, the emergence of angel groups was really a natural extension of the organization of people around the disposition of capital.

So I’ve been asked often we the difference between an angel and a VC is, and the answer is pretty simple. So an angel invests his own money; a VC invests other people’s money. A venture capital firm is a business that is typically set up as a partnership where a small team of partners raise capital and are charged over a period, often of ten years, to invest that capital in privately held companies. The implication of this is that a venture capitalist has to invest a million dollars or more per company for him or her to be able to justify spending time with that investment. An angel investor might give you just as much time for a very, very small investment relative to what a venture capitalist will give you. The angel is investing his or her own money. If he or she loses it, they might only have to own up to their spouse; whereas if the venture capitalist loses it, he or she will have to own up to his partners and perhaps even to his investors. Their motivation more hues towards the financial. There are plenty of angels whose motivations are identical to venture capitalists; but there are very few venture capitalists, if any, that have the whole other range of motivations that angels have. Angel investing is as idiosyncratic as individuals because individuals are at the core of angel investing. Many angels want to try to help find the next Google as a achievement of their perspective in their professional lives. Many angels have a motivation to be mentors, to give back. Many angels invest because it’s a way for them to stay in the game, but not stay up until 2 AM anymore. It’s a way of them to be in their communities in an engaged way that’s relevant to their expertise, and that kind of investor that has a very different motivation that might be somewhat financial, but it’s also very qualitative, and they care more about the experience and more about the engagement from the entrepreneur. Because angels have many different motivations that exceed purely financial ones, the kind of interactions that you have with an angel versus a VC can be very different.

As an entrepreneur, you’re going to want to decide whether to raise capital from an angel, from a VC, from both, or from neither, and all are options. Venture capitalists are a good source for a few million dollars to help prove a theory that requires that kind of capital. Angels are well suited for raising relative smaller amounts of money where advice is important. The first step of any business is to try to put together your plan. You’ll be able to discern how much capital you require and if that capital can be staged. If you’re trying to do something that requires a $10 million machine, then it doesn’t do you any good to raise a million dollars. There’s a inflection point. Ten million dollars is what you need to buy the machine to do the testing you need to make your invention demonstrably work. But some businesses are well adapted to staging financing. There’s someplace meaningful you can get with $500,000 or a million. Where that inflection point is defines what kind of investor you need. If that inflection point is at $500,000 or may cost a million and a half, then that’s a deal that might be appropriate for angels. Conversely, if it’s going to cost $20 million to prove out your theory or your assumptions, it may be that venture capitalists are the only game in town.

The goal though is, by having a clear idea of what your financial plan is, to then marry the right partner to the right goal.

Suggested Readings

Founders School || Financing Your Venture: Angel Investment || Angel Investors and Venture Capitalists || Impact Guide (PDF).

How do Angel Investors Differ From Venture Capitalists?” Rockies Venture Club. Blog post. January 14, 2014.

Financing Your Venture: Venture Capital with Jeff Bussgang – Is Venture Capital Right for You?

Questions for You

How much capital does my business require to get started or to grow to the next level?

Does my inflection point require an investor?

What motivations am I looking for in my investor?

Which type of investor makes more sense for my business and my goals?