Prior to raising capital for the first time, back when I imagined fundraising was the solution to all my problems, I didn’t understand the differences between angel investors and professional investors. I knew they both invested money, I knew I wanted money, and, in my mind, all money was the same. I was wrong.
Because I didn’t understand the differences between angel investors and professional investors (mostly VCs), I reached out to both types of investors indiscriminately. But that was a mistake. Iwasted lots of time trying to fundraise from people who were never going to invest. I also took money from some people I probably never should have taken money from.
In order to save you from the same troubles, here’s a quick primer on the key differences between angel investors and professional investors. It’s the primer I wish someone had given me at the start of my fundraising journey.
Some practical differences
The standard way of distinguishing between angel investors and professional investors is thatangel investors are wealthy individuals who invest their personal money into startups.Professional investors — generallyventure capitalists — investother people’smoney into startups. This means, forangel investors, investing is usually more of a hobby. Forprofessionals, investing is… well… their profession. It’s their job.
These distinctions result in a number of important practical considerations. Of those, the most important are probably the following four:
Difference #1:
Angel investors usually invest smaller amounts of money than professional investors.It’s not uncommon to get a $5,000 check from an angel, which is something a VC would never bother with since they’d have to spend more than that paying their lawyers to review the deal terms.
Difference #2:
Because angels invest smaller amounts of money, they also tend to invest earlier in a company’s growth. This is particularly important if your company is in an idea stage or early developmentstage.Angel investors are more likely to invest their money in a company they personally think has lots of potential, even if none of that potential has been proven yet. In contrast, professional investors don’t invest in ideas. They need evidence that the business can acquire customers and grow.
Difference #3:
Since angels are investing their own money, they don’t have to consult with anyone or get approval before making investments (except, maybe, with a spouse or significant other).As a result, angels can make their investment decisions much faster and can write checks whenever they feel like it.
Difference #4:
Angel investors tend to have more flexibility in terms of the types and stages of companies they can invest in.Again, since they’re spending their own money, they can spend it however they want.In contrast, professional investors raise their funds based on a specific investment thesis and, in most cases, are contractually obligated to their limited partners — LPs — to keep their investments within certain bounds.
Note that, in practice, this fourth difference — the more flexible investing potential of angels — may or may not be particularly useful because people tend to only invest in things they personally understand. For example, if you’re pitching a medical device startup to an angel who made his fortune operating fast food chains, you’re still going to struggle getting an money.
Also worth noting is the fact that all of the above distinctions aren’t rigid. For example, some angels do nothing but invest in startups. It’s basically their job, they’re just using their own money rather than other people’s money. These types of angels are often referred to as “super angels.”
Conversely, some professional investors specifically target early companies. Examples of this type of professional investor are startup accelerator programs. They’re trying to acquire large equity stakes for relatively small investments in lots of very early companies. Most of the companies they invest in will fail, but a few will succeed, and, because the accelerator has such a large (relative) stake, the increased payout will more than make up for all the duds.
In addition, don’t confuse angels with “friends and family.” Friends and family are people who invest in a company because they know the founders personally and want to support them based on their relationships.
Then there are things like “family offices” which exist in a sort of gray area. Family offices are established by incredibly wealthy individuals (think: billionaires). They operate like VCs but don’t have limited partners. Instead,all the money comes from the central family’s wealth. Every family office operates differently, and trying to establish any singular pattern in their investing habits is a waste of time.
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When to target angels versus professionals
As you can hopefully deduce from the aforementioned distinctions, the differences between angel investors and professional investors means you should be approaching them at different times in your startup journey.
For example, if you need funding in order to first develop your product, and you can’t raise money from friends and family or find other ways of sustaining your venture (e.g. bootstrapping), angels are going to be better than VCs.VCs aren’t going to invest without proof of your ability to successfully capture market share.In contrast, angels with deep roots in the industry you’re targeting will have personal experience that will help them get excited about what you’re pitching even without evidence of its viability.
If/when you do have a demonstrable way of capturing market share for a given product, and when you can clearly explain the economics behind the process you’re using, and when those economics are compelling, that’s a perfect time to target professional investors. They’ll be able to supply the larger amount of funding you’ll need in order to scale the business.
Scaling a business, by the way, is always more expensive than initial product development. That’s true even if you’re a startup like Space X and you’re building rocket ships,which is why angels — who give less money — are better for helping support early product development, while professional investors — who give more money — are better for supporting growth.
A critical, intangible difference
Most of what I’ve described so far about the differences between angel investors and professional investors relates to practical and/or logistical issues. But the two types of investors are also unique in a less tangible way that’s still likely to significantly alter the ultimate trajectory of your startup.
In most cases, angel investors are successful former (or current) entrepreneurs who use investing as a mechanism for reinvesting in the startup ecosystem they love. That’s not to suggest they don’t want returns on their investments, but they’re not purely motivated by returns. Angel investors are also interested in mentoring entrepreneurs and, in lots of cases, growing their local entrepreneurial communities. For them, generating a good ROI is important, but they also consider themselves successful when they’ve helped teach and inspire young entrepreneurs.
In contrast, professional investors are primarily profit motivated.They’ve been given money to invest by other people, and their top priority is to generate returns. After all, no LP re-invests in a VC who tells them: “We lost all your money, but we inspired a new generation of entrepreneurs while doing it!”
To be clear, the fact that angels are more mentorship motivated than professional investors isn’t an indictment of venture capitalists. Remember, VCs are doing a job, while angels are pursuing something more akin to a hobby. Still, the different motivations dramatically impact the types of relationships founders have with their investors.
For example, looking back on my career, I continue to speak with and get advice from a number of the angels who invested in my failed companies. In contrast, since those companies failed, I haven’t spoken with a single one of the VC investors.
Again, this difference isn’t inherently good or bad. I don’t personally care that I never chat with my former VCs. Instead, I’m trying to highlight how relationships with different types of investors manifest themselves while building a company.
Specifically, beyond money, your investors will be key stakeholders in your business as well as advice givers and decision makers.As a result, their investment priorities will manifest themselves in the ways they participate in your business.
Put simply, angel investors are more likely to steer you toward decisions that are best for you, as the entrepreneur. Professional investors are more likely to steer you toward decisions that are best for your company.
In the earliest days of a startup, those two things are usually aligned. However, as a business matures, what’s best for you and what’s best for your company will start to diverge. Over time, those differences are likely to become significant.
The investors you choose will impact how smoothly that divergence plays out. For me, personally, I had one company that took professional investment too early, and those investors pressured us into making decisions about scaling our company we never should have made. However, I also had a company that took too much angel money, and my investors encouraged me to make a decision that was best for me, but it probably prevented the company from reaching its full potential.
In other words, neither type of investor is good, bad, better, or worse. The best type of investor to target depends on the situation you’re in and the type of company you’re trying to build. That’s something I didn’t fully understand or appreciate when I was first fundraising, and, as a result, I have regrets about how my startups turned out. Hopefully, after reading this, you’ll be better prepared to make more informed decisions, and the same thing won’t happen to you.
Aaron Dinin teaches entrepreneurship at Duke University. A version of this article originally appeared onMedium, where he frequently posts about startups, sales, and marketing. For more from Aaron, you can also follow him onTwitteror subscribe toWeb Masters,his podcast exploring digital entrepreneurship.
