Angel Investors VS Venture Capitalists - Which One Is Right For You?

- Hi there. Dan Martell here, serial entrepreneur, investor, and creator of SaaS Academy. In this episode, I'm going to share with you the difference between angel investor and venture capitalists.

Super important to know because both of them will give you money, but completely different experiences if you don't understand what motivates each one of them. Be sure to stay at the end, because I'm going to share with you how to get access to my Fundraising Like a Pro training, absolutely free. It's literally responsible for helping startup founders, just like yourself, raise, you know, 50K in seed funding up to 20 million in venture capitalists.

Total, I've helped people raise over 400 million using that framework. I'll share with that later, let's get into it. (upbeat music) So the first time I ever raised money was back in 2009, and I raised about 750K for my company, Flowtown.

And this was like, after building three companies. One, I bootstrapped and exited myself, and I thought, oh, it's going to be easy. I wanted to learn how to raise capital, and trust me, it was a completely different experience than what I thought I would set out to do.

And it was a lot harder, and I had a lot of people kind of laugh at our terms. I didn't understand what some of the things they were saying meant, and eventually I got it done. And then I did it again with clarity.

And the fun part for me is I've helped a lot of SaaS founders out there raise capital. Many of them have been bootstrapped to a certain level and they wanted to raise some angel just to help with some development. Others wanted to go VC round because they wanted to kind of really pour some gas on their fire.

So, what I want to share with you today is what I teach my coaching clients, which is how to understand both because both of them seem the same on the outside, but when you dive in, they're completely different, and understanding those differences will help you avoid raising money from the wrong people with the wrong expectations, and really creating road bumps or speed bumps, or roadblocks in your SaaS business. Let's dive into this. Number one, source of money.

Where does the money come from? Well, the good news is I can tell you, angel investors. I've invested as an angel investor in 40 different companies.

Oh now, even more, 'cause I'm doing about one a quarter. So, angel investing is the individual taking their money and investing, buying private stock in companies. And that's how angels source of capital comes.

Usually they've done something in the past, they have a business, they're high net worth people, they're definitely high net worth people, 'cause it's illegal, I think, for the most part, to invest in private companies, to take stock, without being an accredited investor. So, that's the angel side. The VC's, which I find fascinating, they raise from other investors, sometimes called the limited partner.

So usually the person who starts the venture firm or the fund, they're called the general partner, the GP, and then the LP's are their limited partners. They're the source of money. And, the reason why I find it fascinating is because if you think about it, VC's are just like entrepreneurs in the sense that they have to go raise money too, to fund their VC firm.

Just like you're going out there and maybe asking people for money, they did the same thing, so they, you know, it's kind of neat that they have to feel the same rejection, do the same pitches, and try to get people excited about their business. But those are the main differences, angel, it's their money, VC, it's other people's money. Number two, investment thesis.

So, when it comes to angels over here, angels, I would say, because I've done a tonne of investments, I do it for the fun. I do it to learn. I do it, yes, I want to make money, it has to generate a return.

But for most angels, they do it as almost a way to give back. They do it as a way to learn faster, and they do it in a way to essentially create a portfolio of companies that are high growth, because they're busy, typically with their primary income business, and they just want to have fun. That is the investment thesis.

There's no magic to it. They're just like, hey, I've got this extra capital set aside, I want to be involved in more startups, and aligning my money and my time, and my advice. Sounds like a really good time.

And that's what Angel's investment thesis look like. VC's However, their thesis or ideas around investing is very specific. Typically when they raise their fund, their pool of money, they're saying to their investors, their limited partners, that, hey, I think there's this opportunity in, you know, let's say work B2B SaaS.

So, stuff that helps the new distributed workforce. There's this new trend in the market. Bitcoin SaaS, drone SaaS, artificial intelligence and big data.

There's some kind of specific thesis that they've seen that they're pitching to their investors to raise the money, so when they're looking at deals, they will have a preference. So, you just need to make sure that you're talking to the right people. If it's just a high net worth person, they're just looking to make money, have some fun, and learn some stuff from really young motivated entrepreneurs, and get it going.

But those are the primary two differences. Number three, pitching style. What is it like to pitch those two different types of investors?

Well, number one, the angel is very informal. At the end of the day, most of my investments came from an introduction, to a phone call, to an in person meeting, to writing or wiring a check. I don't, I literally don't know why I did this 'cause I've never actually written a check.

Nope, I'm thinking even when, I've been investing now for 15 years as an angel investor, and I've never written a check. Always wire transfer. It's a lot of money.

It makes no sense. Anyways, you just wire the money. And it's very informal.

Usually in today's world, you know, maybe some Zoom meetings, but there's some eye to eye. There's some contact, you want to see the person. On the VC side, it is a bit more formal.

It's structured. And most VC's have this thing called Monday meetings. In their Monday investor meetings is where all the partners of the investment firm get together.

And some of the investments that they're considering will come in and actually pitch to the partners, right? Now they'll socialise the idea. They'll have shared it internally with their other partners before you show up, so it's not like it's the first time they're hearing about you.

But it is a lot more formal structure. They'll want kind of a pitch deck, et cetera. And it's usually done in an office, or obviously in today's world, maybe through, you know, remote meeting tools, but those are the two big differences, informal versus formal pitching styles.

Number four, check size. How much does an angel usually invest versus a VC? Well, here's the deal.

On average, an angel investor is anybody on the very, very low end, 10K, so $10,000, up to about $250,000, you know, and some angels will give you 500 to a million, but honestly that's the exception, not the norm. But on average, you can expect just an angel investor to invest that range, 10K to 250K. On the VC side, I would say it's at the 250 level on the bottom end, or up to 3 million, especially if you're first time raising, and it's like a pre series A, a seed round, that's about the range of today.

And it's changed over the years. Look, I've been doing this for over 10 years on the venture funding. I've done two venture backed companies, and what used to be a seed round is, you know, dramatically bigger.

The rounds are getting bigger, et cetera, but now we're seeing a lot more efficient companies getting to a higher level of traction, so sometimes their level of traction versus the amount of money they need is a lot lower, so. But on average, you can consider VC's to be between 250 and $3 million check sizes. Number five, investment filter.

What do these two different types of investors look for in regards to making a decision? Well, the angel investor, I mean the cool part is, is that if you can get a high net worth individual, like myself, excited about your idea, and understanding the team, and the market experience you have, and all these things, the total addressable market, and kind of your unique angle, I've seen people raise money with just a story and a prototype. Literally, here's the story.

This is where I think it could be. This is the prototype that shows you the functioning code working, and very little traction or revenue, right? Now, ideally the more you have the better it is for angel investors, but the truth is, is a lot of angel investors, they're high risk people.

They're okay rolling the dice on, you know, a family member, or friend, or an introduction that doesn't have a whole lot today, but there's the essence and the seed of possibility. On the VC side, not the same, all right. The VC side wants to see a thing called traction.

The only part is most of them can't tell you what traction looks like. Here's the deal. They want to see revenue, typically revenue generating product and market, a team formed to kind of, to build this thing that you're building.

But the real thing when they say traction, they mean momentum. They mean what I call performance over time. If performance is on this axis and time is on this axis, every time they meet you, might be two, three, four times, that you're making forward motion.

You're creating momentum. That's what traction means. Just cause you have traction today, but then you have less traction, and then more traction previously, it's a negative investing signal.

So, that's what they mean, is they want to see forward momentum. They want to see performance over time grow. And that's the level, these people will do it on story, the VC's want prototype and traction.

So quick recap, the difference between angel investors and VC's, venture capitalists, source of money, personal versus LP. Investment thesis, fund versus specific. Pitching style, informal versus formal.

Check size, maxes out on the angel at 250, starts at 250K, up to 3 million for the VC's. And investment filter, you know, story and prototype on the angel, and then traction and momentum on the VC. As I mentioned at beginning of this episode, I want to share with you Fundraising Like a Pro training that I put together for my coaching clients.

It is absolutely free. You can click the link below to get access to that. Essentially, go through the three primary phases of fundraising.

The first one, which nobody even knows about, is called pre marketing. And how do you set the foundation to actually get a bunch of investors saying yes, to close your round with speed, and make sure you complete the round. You never want to raise less than you set out to do.

So, be sure to click the link below to download or watch that training, it is free. And if you like this video, be sure to smash the Like button, leave a comment and let me know what was your biggest takeaway from this episode. And as per usual, I want to challenge you to live a bigger life and a bigger business, and I'll see you next Monday.