In any given week I’ll talk to 5 – 10 entrepreneurs, on average. Many of the hey-let’s-get-together meetings are for advice on fundraising, hiring, and sales/marketing. Lately, it feels like the fundraising topic has been especially popular (a sign of the times?). Whereas a few years ago, most entrepreneurs would want to talk about raising venture capital, now more are focused on raising angel rounds, or the equivalent of a Series A round, but not from institutional investors. Naturally, I like to dig into some of the differences when thinking through the alternative financing approaches:
- VCs will require a larger target ownership percentage (e.g. 20-33%) of the company whereas angels are often fine with 1-5% (having a large number of angels could result in the same ownership percentage as a VC)
- VCs will require a board seat (most often) and get heavily involved in the company whereas angels are often more hands-off and passive
- VCs will care more about the company and fight harder to see it succeed (assuming they do their job)
- VCs will work towards and require an exit, often within 5-7 years, whereas angels will expect a return, but are usually more flexible on timing and style (e.g. dividends, exit, etc.)
- Raising VC money makes it more likely that tech banks will provide a large line of credit whereas raising from angels often won’t help with a bank line (bank lines are still available once the startup has a few million in annual recurring revenue)
- Raising VC money is significantly more difficult than raising angel money
The next time an entrepreneur says they want to raise money, ask about angel money vs. venture capital and share some of the pros and cons of each.
What else? What are some more thoughts on raising angel money vs. venture capital?
David Cummings on Startups 
There can be a third alternative: Raising money from a Strategic Investor ( an investor or company that has a direct or indirect interest in your business for some reason)
Advantages: the capital, advice, perhaps themselves as an early customer, good contacts, engineering advice, board members, introduction to and legitimacy to subsequent investors.
Disadvantages: sometimes strategic investors try to demand investment terms that might limit subsequent valuation or exit (such as a right of first refusal on future financings or a right of first refusal on sale of the company). Even if investment terms do not exist the company might be viewed as controlled by the strategic and certain customers or future investors might stay clear of the company.
Don’t cross the streams.
http://academicvc.com/2009/04/16/dont-cross-the-streams/
Sometimes, taking angel money makes sense. Sometimes, raising a venture round makes sense. But think long and hard before planning to do both in the same company.