Tag Archives: angel investments

What’s the Difference Between Angel Investor and VC?

I see this confusion a lot: People use the terms “venture capital,” “venture capitalist,” and “VC” to apply to any outsider investing in a startup. However, it’s really useful to draw some distinctions in this area, between three important classifications: venture capital, angel investors, and anybody else. 

angel investment VC

Venture capital means big-money investment managed by professional investors spending other people’s money. The money comes from extremely wealthy people, insurance companies, university endowments, big corporations, etc. Think of Kleinert Perkins et al., First Round, Softbank, Oak, etc. Venture capital usually comes in millions of dollars. 

Angel investment is people who are accredited investors as defined by the U.S. Securities and Exchange Commision (SEC), which sets wealth criteria:

they must have a net worth of at least one million US dollars, not including the value of their primary residence or have income at least $200,000 each year for the last two years (or $300,000 together with their spouse if married) and have the expectation to make the same amount this year.

Those rules were going to relax with the Jobs Act of 2012, which people would open the gate to crowdfunding, but hasn’t yet.

The most important distinctions between angels and VCS are: 

  1. Angels invest their own money; VCs invest other people’s money. 
  2. Angel investment is much more likely to be in hundreds of thousands than in millions of dollars. 

Aside from those two distinctions, it is generally true that VCs will be more rigorous in studying (called “due diligence”) the investment before they make it. Both angels and VCs will have similar processes for looking at summaries, then pitches, then business plans. 

Anything else is called “friends and family,” which really means “not VC” and “not angel investment.” The laws on investment allow a few so-called friends and family, but there are limits. The intention of all the regulation in this area is to prevent the kind of stock frauds that were rampant during the great depression. 

Q&A: How Do I Get This Startup Financed?

I received this question over the weekend via my ask-me form on timberry.com. I modified it slightly to not include private information. It’s about a web software business. It reads … 

Tim Berry bplans.com timberry.com

… we are gaining traction. Financing is difficult. I am looking to find out what resource you would recommend to get financing for the project. Investment would probably be 100-250k. Would like to go to privates like doctor’s groups but please direct me.

I’ve written a lot about angel investment on this blog and on financing a business in the main articles section on the parent site, bplans.com. Check out particularly this article, the right funding for your business type, which talks about the main options and gives you some basic definitions to work with.  And consider these 5 points: 

  1. Narrow your number. Project sales, cost of sales, fixed costs, spend before launch and development costs and come out with what you think you need. Everybody knows it’s just a guess. But there’s a huge difference in options between $100K and $250K. Name your number and have projections to defend it. Yes, that’s part of a business plan. 
  2. Generally it takes as much legal hassle and legal fixed costs to invest $100,000 as to invest millions. 
  3. If you have to ask about venture capital, you’re not a good candidate. Don’t feel bad about it. Venture capital is very rare, usually goes to high-profile startups led by people who’ve already done it. And the amount you need isn’t enough to interest standard venture capitalists. 
  4. If really have what investors want, you understand the hard truths about startups and investment, and you still think you’re a good candidate for angel investment, go to gust.com, sign up as a startup (it’s free), watch the videos, read the blog posts, and get going. 
  5. If angel investment isn’t likely, then start looking at what they call friends and family, which is what you call doctor’s groups. Talk to your nearest Small Business Development Center (SBDC) (you can find info on these at asbdc-us.org.) The best advice I’ve heard on this is to start asking everybody who they know who might be interested. Don’t ask anybody directly; ask who they know. That’s less awkward and more effective. 

If that doesn’t seem to be getting you anywhere, you should probably read these 10 reasons not to seek investment. And finish up with 5 non-traditional ways to get startup money