Angel investing vs. venture capital

As a startup founder, it’s never been more important to know the nuances of the angel versus venture capital (VC) debate.  Everyone is an investor these days. During our current Cambrian explosion of rolling funds, syndicates, roll-up vehicles and emerging funds, angels and VCs are often confused as the same. When founders come to me about fundraising, I like to distinguish angels from VCs so they have the mental clarity to pull each of these investing levers.  

Here at SVB, we have articles that offer strategies on locating both angel investors and venture capitalists. Neither are mutually exclusive. In fact, you can have both angels and VCs in harmony on your cap table. But it’s important to understand the distinction between the two.

So, what’s changed? With the tremendous growth in venture capital in the last 10 years, firms have increasingly become undifferentiated. To separate themselves from the pack, investors are moving earlier and earlier in a startup’s life stage. Everyone seems to realize that moving earlier means outsized ownership. VCs are out trying to find the single investment that returns their entire fund. Are you going to be the next Facebook, Uber or Airbnb? Of 100 bets, 99 of which will fail, are you going to be the unicorn that returns? It’s a big question that you might not be ready to answer.  

With startup founders today facing outsized opportunities earlier than ever, here’s what to consider:      

1. Angels can help you with more than just funding. They offer human capital, which can be more valuable in the early days than money alone.  

Angels might write you a check for a smaller amount than you’d ideally like, but they can be invaluable to your startup. Some are investing just purely based off their own interest. Often, high conviction angels jump in first, while other investors play the wait-and-see game for a lead VC to de-risk the round. Angels see investing in your company as a bid toward something they intrinsically care about, and they might have social capital in the space you’re building in. And they might offer you objective advice. I've always advised startup founders to build a strong contact list of angel investors. Down the line, they may facilitate introductions to larger lead VCs and family offices. Most angels now are often a combination of operators, scouts, and investors, so you're really getting a lot of out of them.   

2. Angels can be crucial, especially if you’re from an underestimated community. Avoid gatekeepers and find your goalkeepers.    

In Marc Ecko’s book, Unlabel: Selling You Without Selling Out, the fashion designer and entrepreneur writes about how most entrepreneurs obsess about the opinions of gatekeepers. In the startup world, those are the VCs, press, critics and peers that can distract you from building with authenticity. Goalkeepers, on the other hand, tell you that what you’re doing is valuable and empower you to keep creating. They do so through actions, such as angel investing, buying your product, using your services or engaging in your content. Angels are your goalkeepers.  

Underestimated startup founders, like women and BIPOCs, often face an uphill battle fundraising via VCs for a litany of systemic reasons (though organizations like All Raise, Blck VC, and LatinX VC are working to change this). Finding strategic angels — goalkeepers — that personally resonate with your mission statement and your lived experiences might help you gain early traction. From an optics standpoint, creating a deep bench of star-studded angels can also de-risk your round to institutional investors.

Angels can also be a key beachhead to closing your round. They can help you find other founders whose mission aligns with yours, have similar experiences with fundraising, or are working in a similar but not competitive space. Consider asking them who their angels are. In addition, angels emerge out of liquidity events, so look at the angel networks that spring from IPOs, such as #ANGELS or Backbone Angels, that support women, BIPOC founders and more.   

3. VCs work on a longer timeframe.   

I think of angels as your true believers: early Taylor Swift fans that “got” her before she became the Taylor Swift. Angels help you overcome the cold start problem—they help you push from zero to one. Beyond that, they create a type of social signal to the VCs that your company is legit. They can be incredibly influential, but your partnership with them might last shorter than you think.   

To a certain extent, VCs are viewed as the adults in the room. Partnering with them is almost a marriage, lasting up to 10 or 20 years, or even beyond. Post Series A, VCs tend to start to eclipse angels in terms of involvement. Angels tend to start petering out as those lead and growth investors begin to take more outsized ownership and board seats over time.   

This is not to say that every startup needs to take this path. Calendly — a Silicon Valley Bank client — is a great example of a startup that bootstrapped while struggling with fundraising early, growing mindfully and intentionally on the founders’ terms until it was ready for growth stage venture injection. Now it’s a $3 billion company. Search around and you can find similar stories of dormant startups that catapulted themselves at the growth stage because they were patient about building up their revenue base.    

4. VC funding might help you hit a milestone. But it’s not your end goal.   

The first existential question I always ask startup founders is, “Do you truly want to be venture backed?” The next question I ask is, “Have you looked at the different options and concluded that it’s the only way to supercharge your growth?” I think a lot of founders will follow the herd mentality of “Oh, I raised $11 million from Sequoia and got on TechCrunch, and that means I’m successful.” But hitting a fundraising milestone shouldn’t be a celebration. It’s a means to an end but not the end itself. Due to the social media-driven frenzy around sexy fundraising events, founders often confound the fundraise with the end state. But the brutal reality is that for every dollar you raise you will have to return it at X multiple. Not every founder wants to sign up for that steroid injection.     

5. VCs won't magically reveal the way. Only you can do that.

Sometimes a startup founder’s case for VC is clear, for example: 

• You’ve found a product market fit.  
• You need distribution.  
• You need a partnership.  
• You need key engineering hires that you can't afford by bootstrapping or with your current business model.  

Maybe you’re an enterprise SaaS company with $1 million annual recurring revenue and an ideal customer profile. Venture capital might be the push that allows you to sell upstream to much bigger Fortune 500 clients. When everything’s working, and you just need to supercharge your startup, that’s the time for venture capital.  

But if you haven’t quite found your purpose, VC money likely won’t help. If you still need freedom to roam and test things out, venture is probably not the best way. If you end up raising VC money before you find product market fit, it can come back to bite you because you’ll be under pressure to make something work without the fundamentals to do so. It’s like putting a supercar engine in a go kart: you’ll spin out...or worse. I caution founders from raising too much venture money early.

Final thoughts

I like to say that finding your purpose and your product-market fit is a Heart of Darkness journey. No amount of money, outsourcing, or consulting is going to be able to get you there. That path is for you, and you alone, to find.