Riding With VCs Or Flying With Angels? Here’s What You Must Know
In a recent Medium publication by Tomi Davies, a Nigerian investor from ABAN Angels, it was cited that angel ventures are usually more patient and more willing to work with startups for longer when compared to venture capitalists. This is not far from the truth, as angel investments often do not come with the same time constraints and limits as obtainable with VCs.
African startup funding is still in its infancy, but a matured early-stage, as the continent has been in the reception of a proliferation of investments, both in the tech and non-tech spaces.
Angel investment, according to Davies, is still nascent. And, recently there has been an uprising of angel networks across the continent, mostly in Africa’s triplet venture spots – Nigeria, South Africa, and Kenya.
When we say that a startup has raised funding from an angel investor, it may be somewhat confusing what’s the difference between the two sources of investments. But not for long. There are many ways in which the least, average, and topmost venture capitalist differ from the same levels for an angel.
Angel investors are individuals who invest their personal money in some companies, doing so with financial management or professional investment backgrounds. Either former or current entrepreneurs, it is not uncommon for them to be successful businesspersons themselves.
They usually invest by leveraging their personal operating experience on the back of their expertise with business or leadership in some companies. Such background has a strong influence on the type of industries they will want to put their money into and the kind of entrepreneurs that inspire them to invest.
On the other hand, venture capitalists, who may as well be former entrepreneurs, come from an investment banking or financial management background.
This determines the kind of entrepreneurs they interact with and how they assess them. What’s more, VCs are always from a firm or company that pools money from groups of investors into a collective fund to invest in startups.
Due to the disparity between the nature of cash being invested, they often have a higher tolerance for risk compared to angels. But at the end of the day, angels take more risks because they are spending their own money, which is why they are often skeptical about the kind of businesses they pump funds into.
This is somehow obvious. Looking at the amounts and volumes of angel investments versus that of venture capitalists this year, the difference is clear – VCs invest more enormous sums of money and more frequently than angels.
If a startup is considering the possibility of pitching an angel investor, it knows the kind of money it’s going to get if investments come through. Angels typically invest between USD 25 K to USD 100 K, but could sometimes spend more or less. When angels pull their resources together for a single funding, they might invest up to USD 750 K or more.
On a general note, angel investing is a quick solution, but for the fact that their relatively limited financial capacity, angels are not always able to fund the entire capital requirements of a business.
Also, angel investors may have to rebalance their overall portfolio by selling some stocks in order to free up sufficient cash to invest in a startup.
Contrastingly on average, venture capitalists invest an average of USD 7 Mn in a startup. If the money is not put to work, it loses value, so VCs invest elsewhere before the funds are reallocated to a startup.
While angels do this too, VCs generally do not get 100 percent of the money invested upfront. Rather, they have to periodically issue capital calls to their limited partners (LPs), requesting for their next tranche of money.
Angels focus on investing in businesses that are at their infancy, the earliest of earliest. They also specialize in funding late-stage technical developments and early market entry.
This means that a startup that launched this year is more likely to land an angel investment first and grow for a few years before approaching a venture capital firm.
The funds provided by angel investors can make a lot of difference when it comes to getting a business up and running. Angels are more concerned with helping you start the business and scaling it to a significant level. According to Davies, venture capitalists have minimum investment ticket sizes that can “choke the life out of newborn businesses.”
According to him, angels are rising and flying across the African business landscape to solve this problem. Well, VCs do invest in early-stage companies, but not likely earlier than angels do.
They focus more on businesses that have developed to reduce risk, depending on their focus. But should a startup displays seductive promises and substantial growth potential at any stage, a VC will be more keen to invest, regardless of whether it was founded yesterday.
By and large, venture capitalists are out for the business with provable traction – no one wants to put money into something that has not been able to survive by itself. The business typically should demonstrate its ability to scale and succeed, only for a VC to offer money to champion that potential.
VCs are popular people, to say the least. They are in the business deal flow and have ears open to the music of as many startups as possible. To fuel this urge to be out there and informed, they make themselves public and accessible. Among entrepreneurs, VCs are veritable celebrities.
They are always active on Twitter, Instagram, Medium, and popular blogs, in bid to let startups know of their existence. Yele Bademosi, from Nigeria’s early-stage VC firm, Microtraction, and Keet Van Zyl, from South Africa’s Knife Capital, prove this – they tweet at least once every two days, I think.
But angels are more often than not, ghosts. Most times, their identities are kept a secret when they invest in a startup, even though the amount injected will be disclosed.
Also, they are harder to find, because they do not want to be inundated by deal flow. For angels, startup investing is more or less a hobby, and they balance it with other obligations.
If angel investors are too open and accessible, there’s every likeliness that that will be bombarded by entrepreneurs looking to win some money over. This is because startups know that angel money is easier to get than that of VCs.
Only the most active angel investors tend to blog, tweet, and show their investment activities. Remember how Serena Williams kept her secret venture a secret for many years?
We do not know why the US tennis star decided to announce her investment platform, but we are sure that most angels are not digital natives. In some cases, the love of peace and quiet is what makes them unwilling to be out there. Maybe they want to be more like real angels, if they exist, after all. They sometimes, in some regions, stay under the radar due to security reasons.
Impact On Investee
If a startup does not take care, a venture capitalist will crush it. That’s because venture funds are mandated to bring returns for their LPs. To not get into the bad books of such partners, at least one or two of their investments should produce excellent returns – up to 30 times greater per funding.
Looking to counteract the fund’s bad engagements – or more directly, failed startups – VCs, tend to encourage their investees to swing for the fences and get their fingers in so many pies.
It won’t be entirely wrong or unfounded to say that venture capitalists “sometimes” push entrepreneurs to reach for the sky, which could involve spending big and taking big, calculated risks, as far as it has the potential to turn the startup into a colourful unicorn.
Angel investors, diverse as they are, do not always want to push startups to take unwise risks the way VCs do. Inasmuch as they are investing their personal money, they offer mentorship and access to useful networks.
While VCs take board seats, angels do not, and reinforce their ability to influence your startup. They’d rather not pressure, but advice the startup to make better business decisions.
Featured Image: Jay Adelson Via Youtube