An angel investor is someone investing her own money. A venture capitalist is investing someone else’s money.&nbsp;<ul><li>From that key fundamental difference comes two entire entirely different sets of motivations and processes.</li><li>From this fundamental difference also comes a completely different way of thinking of investing and huge differences in how the two types of investors work with startups.</li></ul>

Key Difference Between Angels and VCs

<figure><img alt="" src="https://miro.medium.com/max/500/1*mwF_Y2UHtItjU4LErPp4F" width="680" height="616"><figcaption class="il im cy cw cx in io cd b fy cf cg" data-selectable-paragraph="" dir="ltr">Image by <a href="https://pixabay.com/users/mohamed_hassan-5229782/" class="cj ip" rel="noopener ugc nofollow" dir="ltr">Mohamed Hassan</a> on <a href="https://pixabay.com/" class="cj ip" rel="noopener ugc nofollow" dir="ltr">Pixabay</a></figcaption></figure>Imagine your product has two different types of customers. You’ll spend months doing customer discovery to choose the right beachhead customers and tailor the messaging to their needs. And then you’ll lump all investors into a single bucket and approach them in the same way.As an angel investor for over ten years and now a venture capitalist putting together a hardtech sustainability fund, I’ve seen thousands of pitches by early-stage startups. The ones that succeed do their homework, know who they’re pitching to, and understand what each investor is looking for.The vast majority of pitches, though, are generic: “We have a great product and a great team so come invest in us.” For an early-stage startup with little or no customer traction yet, that isn’t good enough.Pitching is a type of sales, except instead of selling products to users, you’re selling stock in the business to investors. In the same way you hone your marketing to attract particular customers, you need to tailor your pitch to investors.That should start with an understanding the two categories of early-stage investors — angels and venture capitalists — and the different motivations and constraints each have for investing.<h1 data-selectable-paragraph="">Key Difference Between Angels and VCs</h1>What’s the one thing that differentiates an angel from a VC? The stage of investing? Individual or a fund? Whether investing is a full-time job or not? Nope. All of those are effects of the real difference between the two types of startup investors.An angel investor is someone investing her own money. A venture capitalist is investing someone else’s money. From that key fundamental difference comes two entire entirely different sets of motivations and processes.Think about it a moment. You’ve got $1 million saved after working a long career. You can spend it traveling the world or buying vacation homes. Or you can invest it in Apple stock, S&amp;P index funds, rental property, or cryptocurrency. Or you can invest in startups.No matter what you do, it’s your own money. You answer only to your spouse and the kids waiting for their inheritance.Now imagine you’re a venture capitalist. You raise money from big investors and they pay you to invest their money for them. It’s other people’s money that comes from LPs (limited partners), mostly retirement funds, insurance companies, university endowments, and seriously rich families putting a small fraction of their cash hoard into higher-earning “alternative investments”.Writing a cheque, even a small one, out of my own bank account is always a struggle. Investing other people’s money seems easier. Wouldn’t you enjoy writing $10 million cheques to startups? Even if all your investments fail, you still get paid a really nice salary. At least for a short while.But with other people’s money comes responsibility and reporting. As an angel, I can invest on a hunch. I can invest because I want to support sustainability, or help a deserving founder. As a VC, I can’t do that.A VC has to report to their LPs explaining everything they’re doing. It’s a job. No matter how well it pays, you’re working for someone else. You’re investing on their behalf. If they don’t like your investments, they won’t invest in your next fund, and then you’ll be out of job.From this fundamental difference comes a completely different way of thinking of investing and huge differences in how the two types of investors work with startups.<h2 data-selectable-paragraph="">Cheque Sizes</h2>Angels are well off, of course, but most are not seriously rich. I’ve met hundreds of fellow angels and have yet to meet one who owns a private jet. We have money to invest, but not millions, so check sizes are typically in the tens of thousands.For VCs, every investment requires significant research, then ongoing reporting and involvement on the board. This takes time and effort. A fund can only do a few investments per year.A $100M fund can only support about 20 investments, meaning the check size needs to average $5M. A smaller fund will have fewer employees meaning fewer investments instead of smaller cheque sizes, while a billion dollar fund will focus on bigger, later-stage investments.<h2 data-selectable-paragraph="">Investment Stage</h2>With my typical check size of $25K, my investing is limited to seed and pre-seed stages. I’d love to invest in later rounds when it’s a lot clearer who’ll be successful, but with an investment round of $10M, nobody wants to my little $25K cheque. So angels invest almost exclusively at very early stages.Conversely, with a $5M average check size and a $1M-$2M minimum, VCs have difficulty investing at the earliest stages and typically focus on Series A and later.<h2 data-selectable-paragraph="">Sector Specialization</h2>Both angels and VCs usually specialize in particular sectors but for different reasons.Individual angels almost always invest in areas where we have personal knowledge and interest. I focus my investments in energy sustainability, an area of both academic background and personal passion.When looking for angel investors, target people in your field who understand your solution. Pitches to random people with angel investor in their LinkedIn profile are a waste of time.VCs also specialize in particular sectors as a business decision. They’ll focus on the hottest sectors where returns look juiciest or LPs are most interested in having exposure. One year it’ll be SaaS, the next year AI, the following year crypto. This year’s hot topic is sustainability and everyone is piling in.VCs will pitch their LPs on a narrative that they have the best insights, best connections, and best deal flow in a particular field, and that allows them to invest more successfully than other VCs they’re competing with for LP’s dollars.By focusing on a particular sector, VCs can hire staff and consultants knowledgeable in a field. They can attend trade shows, build end user contacts, and cultivate relationships with potential acquirers. They can fund sector accelerators, speak on panels, and write industry reports. A VC can become enmeshed in a sector ecosystem to get a first look at the most promising startups and guide them to success.In targeting VC firms to pitch to, focus on the top ones in your sector. And don’t waste time on ones with no history of investing in startups in your field. No matter how attractive the opportunity, they can’t invest outside of the thesis they’ve sold their LPs on.<h2 data-selectable-paragraph="">Diligence Process</h2>Most angel investors are not full-time investors. We can spend some time researching a company but not a lot. Which is why I focus my angel investing on areas I know well and have good connections. Once I’m satisfied that an investment looks interesting, I can make my own decision. The diligence process tends to be ad-hoc and differs from person to person.In investing other people’s money, VCs have to document their decision making process. That’s their full time job, and they can spend as long as necessary to fully justify an investment to outsiders.VCs have assistants and interns on the staff to help out, and have a budget to hire experts to perform technical analysis. The entire process can be long and intrusive, and in the end, goes to a vote of the investment committee which might not approve it.<h1 data-selectable-paragraph="">Understand the Motivations to Attract Enthusiastic Investors</h1>Gambling my own money on an early-stage startup is a risky proposition. But if you can convince me your startup is a good investment, I can write a small check. I’m doing this not because I have to, but because I want to join your journey.Show me that you’re not only offering a great investment, but that you value my contribution. You want me to be part of the team, and are looking for more than just money. Make me feel wanted, my contributions needed, my experience respected. Bring me on-board the same way you’d recruit a key hire. Make me feel proud to join the team.VC motivation is completely different. VC investments have to look good to their current LPs and future LPs in their next fund. A VC not only has to consider whether an investment is sound, but whether it looks sound: if an investment fails, as 90% ultimately do, VCs don’t want their LPs call up screaming, “What the hell were you thinking?”To get a VC to invest, focus on VCs in your particular sector. Then show that not only are you offering a great investment, but a low-risk one in a hot area. Convince them that you’ll be the one investment that they’ll feature on their website because yours was the smartest investment.Even within these two broad categories of angels and VCs there are big differences between each one, just as there are differences between individual customers. Do your research, concentrate your efforts on the best fits, and explain not only why your startup is a great investment, but the best investment for them.

Imagine your product has two different types of customers. You’ll spend months doing customer discovery to choose the right beachhead customers and tailor the messaging to their needs. And then…

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Imagine your product has two different types of customers. You’ll spend months doing customer discovery to choose the right beachhead customers and tailor the messaging to their needs. And then you’ll lump all investors into a single bucket and approach them in the same way.

As an angel investor for over ten years and now a venture capitalist putting together a hardtech sustainability fund, I’ve seen thousands of pitches by early-stage startups. The ones that succeed do their homework, know who they’re pitching to, and understand what each investor is looking for.

The vast majority of pitches, though, are generic: “We have a great product and a great team so come invest in us.” For an early-stage startup with little or no customer traction yet, that isn’t good enough.

Pitching is a type of sales, except instead of selling products to users, you’re selling stock in the business to investors. In the same way you hone your marketing to attract particular customers, you need to tailor your pitch to investors.

That should start with an understanding the two categories of early-stage investors — angels and venture capitalists — and the different motivations and constraints each have for investing.

What’s the one thing that differentiates an angel from a VC? The stage of investing? Individual or a fund? Whether investing is a full-time job or not? Nope. All of those are effects of the real difference between the two types of startup investors.

An angel investor is someone investing her own money. A venture capitalist is investing someone else’s money. From that key fundamental difference comes two entire entirely different sets of motivations and processes.

Think about it a moment. You’ve got $1 million saved after working a long career. You can spend it traveling the world or buying vacation homes. Or you can invest it in Apple stock, S&P index funds, rental property, or cryptocurrency. Or you can invest in startups.

No matter what you do, it’s your own money. You answer only to your spouse and the kids waiting for their inheritance.

Now imagine you’re a venture capitalist. You raise money from big investors and they pay you to invest their money for them. It’s other people’s money that comes from LPs (limited partners), mostly retirement funds, insurance companies, university endowments, and seriously rich families putting a small fraction of their cash hoard into higher-earning “alternative investments”.

Writing a cheque, even a small one, out of my own bank account is always a struggle. Investing other people’s money seems easier. Wouldn’t you enjoy writing $10 million cheques to startups? Even if all your investments fail, you still get paid a really nice salary. At least for a short while.

But with other people’s money comes responsibility and reporting. As an angel, I can invest on a hunch. I can invest because I want to support sustainability, or help a deserving founder. As a VC, I can’t do that.

A VC has to report to their LPs explaining everything they’re doing. It’s a job. No matter how well it pays, you’re working for someone else. You’re investing on their behalf. If they don’t like your investments, they won’t invest in your next fund, and then you’ll be out of job.

From this fundamental difference comes a completely different way of thinking of investing and huge differences in how the two types of investors work with startups.

Angels are well off, of course, but most are not seriously rich. I’ve met hundreds of fellow angels and have yet to meet one who owns a private jet. We have money to invest, but not millions, so check sizes are typically in the tens of thousands.

For VCs, every investment requires significant research, then ongoing reporting and involvement on the board. This takes time and effort. A fund can only do a few investments per year.

A $100M fund can only support about 20 investments, meaning the check size needs to average $5M. A smaller fund will have fewer employees meaning fewer investments instead of smaller cheque sizes, while a billion dollar fund will focus on bigger, later-stage investments.

With my typical check size of $25K, my investing is limited to seed and pre-seed stages. I’d love to invest in later rounds when it’s a lot clearer who’ll be successful, but with an investment round of $10M, nobody wants to my little $25K cheque. So angels invest almost exclusively at very early stages.

Conversely, with a $5M average check size and a $1M-$2M minimum, VCs have difficulty investing at the earliest stages and typically focus on Series A and later.

Both angels and VCs usually specialize in particular sectors but for different reasons.

Individual angels almost always invest in areas where we have personal knowledge and interest. I focus my investments in energy sustainability, an area of both academic background and personal passion.

When looking for angel investors, target people in your field who understand your solution. Pitches to random people with angel investor in their LinkedIn profile are a waste of time.

VCs also specialize in particular sectors as a business decision. They’ll focus on the hottest sectors where returns look juiciest or LPs are most interested in having exposure. One year it’ll be SaaS, the next year AI, the following year crypto. This year’s hot topic is sustainability and everyone is piling in.

VCs will pitch their LPs on a narrative that they have the best insights, best connections, and best deal flow in a particular field, and that allows them to invest more successfully than other VCs they’re competing with for LP’s dollars.

By focusing on a particular sector, VCs can hire staff and consultants knowledgeable in a field. They can attend trade shows, build end user contacts, and cultivate relationships with potential acquirers. They can fund sector accelerators, speak on panels, and write industry reports. A VC can become enmeshed in a sector ecosystem to get a first look at the most promising startups and guide them to success.

In targeting VC firms to pitch to, focus on the top ones in your sector. And don’t waste time on ones with no history of investing in startups in your field. No matter how attractive the opportunity, they can’t invest outside of the thesis they’ve sold their LPs on.

Most angel investors are not full-time investors. We can spend some time researching a company but not a lot. Which is why I focus my angel investing on areas I know well and have good connections. Once I’m satisfied that an investment looks interesting, I can make my own decision. The diligence process tends to be ad-hoc and differs from person to person.

In investing other people’s money, VCs have to document their decision making process. That’s their full time job, and they can spend as long as necessary to fully justify an investment to outsiders.

VCs have assistants and interns on the staff to help out, and have a budget to hire experts to perform technical analysis. The entire process can be long and intrusive, and in the end, goes to a vote of the investment committee which might not approve it.

Understand the Motivations to Attract Enthusiastic Investors

Gambling my own money on an early-stage startup is a risky proposition. But if you can convince me your startup is a good investment, I can write a small check. I’m doing this not because I have to, but because I want to join your journey.

Show me that you’re not only offering a great investment, but that you value my contribution. You want me to be part of the team, and are looking for more than just money. Make me feel wanted, my contributions needed, my experience respected. Bring me on-board the same way you’d recruit a key hire. Make me feel proud to join the team.

VC motivation is completely different. VC investments have to look good to their current LPs and future LPs in their next fund. A VC not only has to consider whether an investment is sound, but whether it looks sound: if an investment fails, as 90% ultimately do, VCs don’t want their LPs call up screaming, “What the hell were you thinking?”

To get a VC to invest, focus on VCs in your particular sector. Then show that not only are you offering a great investment, but a low-risk one in a hot area. Convince them that you’ll be the one investment that they’ll feature on their website because yours was the smartest investment.

Even within these two broad categories of angels and VCs there are big differences between each one, just as there are differences between individual customers. Do your research, concentrate your efforts on the best fits, and explain not only why your startup is a great investment, but the best investment for them.

Understanding the Difference Between Angels and Venture Capitalists

Key Difference Between Angels and VCs

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