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

Channel: Dan Martell

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- Hi there. Dan Martell here, serial entrepreneur, investor,

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and creator of SaaS Academy.

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In this episode, I'm going to share with you the difference

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between angel investor and venture capitalists.

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Super important to know

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because both of them will give you money,

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but completely different experiences

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if you don't understand what motivates each one of them.

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Be sure to stay at the end,

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because I'm going to share with you how to get access

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to my Fundraising Like a Pro training, absolutely free.

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It's literally responsible for helping startup founders,

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just like yourself, raise, you know,

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50K in seed funding up to 20 million in venture capitalists.

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Total, I've helped people raise

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over 400 million using that framework.

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I'll share with that later, let's get into it.

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(upbeat music)

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So the first time I ever raised money was back in 2009,

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and I raised about 750K for my company, Flowtown.

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And this was like, after building three companies.

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One, I bootstrapped and exited myself,

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and I thought, oh, it's going to be easy.

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I wanted to learn how to raise capital,

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and trust me, it was a completely different experience

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than what I thought I would set out to do.

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And it was a lot harder,

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and I had a lot of people kind of laugh at our terms.

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I didn't understand what some

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of the things they were saying meant,

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and eventually I got it done.

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And then I did it again with clarity.

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And the fun part for me is I've helped a lot

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of SaaS founders out there raise capital.

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Many of them have been bootstrapped to a certain level

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and they wanted to raise some angel

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just to help with some development.

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Others wanted to go VC round because they wanted

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to kind of really pour some gas on their fire.

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So, what I want to share with you today

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is what I teach my coaching clients,

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which is how to understand both

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because both of them seem the same on the outside,

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but when you dive in, they're completely different,

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and understanding those differences will help you

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avoid raising money from the wrong people

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with the wrong expectations,

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and really creating road bumps or speed bumps,

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or roadblocks in your SaaS business.

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Let's dive into this.

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Number one, source of money.

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Where does the money come from?

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Well, the good news is I can tell you, angel investors.

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I've invested as an angel investor

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in 40 different companies.

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Oh now, even more, 'cause I'm doing about one a quarter.

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So, angel investing is the individual taking their money

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and investing, buying private stock in companies.

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And that's how angels source of capital comes.

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Usually they've done something in the past,

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they have a business, they're high net worth people,

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they're definitely high net worth people,

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'cause it's illegal, I think, for the most part,

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to invest in private companies, to take stock,

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without being an accredited investor.

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So, that's the angel side.

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The VC's, which I find fascinating,

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they raise from other investors,

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sometimes called the limited partner.

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So usually the person who starts the venture firm

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or the fund, they're called the general partner, the GP,

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and then the LP's are their limited partners.

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They're the source of money.

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And, the reason why I find it fascinating is

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because if you think about it,

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VC's are just like entrepreneurs in the sense that

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they have to go raise money too,

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to fund their VC firm.

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Just like you're going out there

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and maybe asking people for money,

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they did the same thing, so they, you know,

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it's kind of neat that they have to feel the same rejection,

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do the same pitches,

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and try to get people excited about their business.

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But those are the main differences,

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angel, it's their money,

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VC, it's other people's money.

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Number two, investment thesis.

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So, when it comes to angels over here,

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angels, I would say, because I've done a tonne of investments,

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I do it for the fun.

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I do it to learn.

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I do it, yes, I want to make money,

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it has to generate a return.

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But for most angels,

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they do it as almost a way to give back.

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They do it as a way to learn faster,

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and they do it in a way to essentially create a portfolio

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of companies that are high growth,

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because they're busy,

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typically with their primary income business,

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and they just want to have fun.

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That is the investment thesis.

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There's no magic to it.

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They're just like,

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hey, I've got this extra capital set aside,

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I want to be involved in more startups,

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and aligning my money and my time, and my advice.

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Sounds like a really good time.

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And that's what Angel's investment thesis look like.

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VC's However, their thesis or ideas around investing

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is very specific.

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Typically when they raise their fund, their pool of money,

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they're saying to their investors, their limited partners,

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that, hey, I think there's this opportunity in, you know,

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let's say work B2B SaaS.

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So, stuff that helps the new distributed workforce.

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There's this new trend in the market.

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Bitcoin SaaS, drone SaaS,

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artificial intelligence and big data.

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There's some kind of specific thesis that they've seen

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that they're pitching to their investors to raise the money,

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so when they're looking at deals,

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they will have a preference.

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So, you just need to make sure that you're talking

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to the right people.

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If it's just a high net worth person,

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they're just looking to make money,

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have some fun, and learn some stuff

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from really young motivated entrepreneurs, and get it going.

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But those are the primary two differences.

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Number three, pitching style.

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What is it like to pitch

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those two different types of investors?

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Well, number one, the angel is very informal.

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At the end of the day,

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most of my investments came from an introduction,

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to a phone call, to an in person meeting,

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to writing or wiring a check.

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I don't, I literally don't know why I did this

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'cause I've never actually written a check.

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Nope, I'm thinking even when,

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I've been investing now for 15 years as an angel investor,

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and I've never written a check.

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Always wire transfer.

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It's a lot of money.

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It makes no sense.

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Anyways, you just wire the money.

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And it's very informal.

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Usually in today's world, you know,

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maybe some Zoom meetings,

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but there's some eye to eye.

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There's some contact, you want to see the person.

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On the VC side, it is a bit more formal.

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It's structured.

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And most VC's have this thing called Monday meetings.

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In their Monday investor meetings is where all the partners

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of the investment firm get together.

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And some of the investments that they're considering

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will come in and actually pitch to the partners, right?

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Now they'll socialise the idea.

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They'll have shared it internally with their other partners

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before you show up, so it's not like

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it's the first time they're hearing about you.

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But it is a lot more formal structure.

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They'll want kind of a pitch deck, et cetera.

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And it's usually done in an office,

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or obviously in today's world, maybe through,

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you know, remote meeting tools,

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but those are the two big differences,

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informal versus formal pitching styles.

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Number four, check size.

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How much does an angel usually invest versus a VC?

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Well, here's the deal.

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On average, an angel investor is anybody on the very,

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very low end, 10K, so $10,000,

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up to about $250,000, you know,

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and some angels will give you 500 to a million,

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but honestly that's the exception, not the norm.

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But on average, you can expect just an angel investor

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to invest that range, 10K to 250K.

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On the VC side, I would say it's at the 250 level

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on the bottom end, or up to 3 million,

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especially if you're first time raising,

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and it's like a pre series A, a seed round,

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that's about the range of today.

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And it's changed over the years.

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Look, I've been doing this for over 10 years

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on the venture funding.

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I've done two venture backed companies,

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and what used to be a seed round is, you know,

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dramatically bigger.

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The rounds are getting bigger, et cetera,

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but now we're seeing a lot more efficient companies getting

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to a higher level of traction,

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so sometimes their level of traction versus the amount

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of money they need is a lot lower, so.

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But on average, you can consider VC's

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to be between 250 and $3 million check sizes.

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Number five, investment filter.

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What do these two different types of investors look for

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in regards to making a decision?

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Well, the angel investor, I mean the cool part is,

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is that if you can get a high net worth individual,

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like myself, excited about your idea,

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and understanding the team,

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and the market experience you have,

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and all these things, the total addressable market,

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and kind of your unique angle,

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I've seen people raise money

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with just a story and a prototype.

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Literally, here's the story.

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This is where I think it could be.

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This is the prototype that shows you

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the functioning code working,

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and very little traction or revenue, right?

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Now, ideally the more you have the better it is

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for angel investors,

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but the truth is, is a lot of angel investors,

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they're high risk people.

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They're okay rolling the dice on, you know,

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a family member, or friend, or an introduction

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that doesn't have a whole lot today,

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but there's the essence and the seed of possibility.

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On the VC side, not the same, all right.

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The VC side wants to see a thing called traction.

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The only part is most of them can't tell you

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what traction looks like.

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Here's the deal.

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They want to see revenue,

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typically revenue generating product and market,

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a team formed to kind of,

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to build this thing that you're building.

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But the real thing when they say traction,

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they mean momentum.

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They mean what I call performance over time.

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If performance is on this axis and time is on this axis,

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every time they meet you, might be two, three, four times,

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that you're making forward motion.

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You're creating momentum.

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That's what traction means.

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Just cause you have traction today,

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but then you have less traction,

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and then more traction previously,

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it's a negative investing signal.

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So, that's what they mean,

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is they want to see forward momentum.

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They want to see performance over time grow.

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And that's the level, these people will do it on story,

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the VC's want prototype and traction.

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So quick recap, the difference between angel investors

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and VC's, venture capitalists, source of money,

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personal versus LP.

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Investment thesis, fund versus specific.

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Pitching style, informal versus formal.

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Check size, maxes out on the angel at 250,

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starts at 250K, up to 3 million for the VC's.

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And investment filter, you know,

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story and prototype on the angel,

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and then traction and momentum on the VC.

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As I mentioned at beginning of this episode,

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I want to share with you Fundraising Like a Pro training

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that I put together for my coaching clients.

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It is absolutely free.

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You can click the link below to get access to that.

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Essentially, go through the three primary phases

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of fundraising.

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The first one, which nobody even knows about,

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is called pre marketing.

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And how do you set the foundation to actually get a bunch

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of investors saying yes,

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to close your round with speed,

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and make sure you complete the round.

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You never want to raise less than you set out to do.

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So, be sure to click the link below to download

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or watch that training, it is free.

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And if you like this video,

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be sure to smash the Like button,

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