Understanding the Fundamental Differences of Angel vs. Venture Capital Funding

"Funding" became both a buzzword and emotional panacea 5-7 years ago wherein various films and high profile IPOs have transformed software and hardware technology sectors into elevators to overnight wealth and prestige.

So often, individuals with ideas and ambition figure that someone else will simply give them money to build an app and sustain their lifestyle while they build this product before the company goes public or is acquired by another company. So casual is this logic.

Aside from the numerous difficulties of building a software or hardware which other individuals will pay for, I encounter so many who don't understand the reality of fundraising for an idea. It's tough! Given my activity in black startup spaces and ecosystems, this low level of awareness of fundraising logistics and conventions is painfully prevalent.

In my research of start-up investing, I have put forth a basic comparison of angel investors to venture capitalists, followed by some key questions founders, black or white founders can ask themselves.

What Makes someone an Angel Investor?

Troy Carter, a famous music talent manager, has gotten active in Angel Investing through a Syndicate

As described to an NYC audience in 2013 by Brian Cohen of New York Angels, "Anyone can, in theory, become an angel investor. An angel investor can simply be a high net worth individual who lends money as an individual to friends, family members or members of their professional networks."

In the United States, SEC Regulations require that companies may only sell securities such as debt holdings to accredited investors who by law have assets in excess of $1 million (excluding the value of their home) or have an income of over $200,000 for the last 3 years.*

Such an angel investor will normally have a more straight forward term sheet, asks for a far less of a return than venture capitalists will and invests in early stage seed rounds before a founder starts to push for more growth in the number of users.

Some notable and rising angel investors include Jason Calacanis, Gil Pechina, Chris Sacca and Troy Carter.

More recently, individual angel investors have teamed up into syndicates of 8-10 investors, allowing individuals to do more deals with the same amount of their own money.

Big League Dollars for Real Deal companies: Venture Capital

On the other hand, Venture Capital investors are institutional in nature and are looking for immensely scalable ideas with possibly 10-12x returns on their initial investment.

Venture capital firms, in comparison to angel investors, invest later into a start-up after it already has market traction and validation, in what are often called Series A or Series B investment rounds (in reference to the preferred stock being sold to investors in return for their investment).

Troy Carter and Tim Draper, of Draper Associates and DJ and Jason Calacanis have a fireside chat about the startup ecosystem and particular new companies

Some notable venture capital companies include Andreessen Horowitz, Union Square Ventures, Khosla Ventures and Sequoia Capital.

Another convention in startup investing is the use of angel investors as scouts for larger venture capital firms, helping them identify and invest in very early stage companies which venture capitalists are unable to invest in.

As reported by the Wall Street Journal, such scouting by angel investors by venture capitalists was behind Jason Calacanis' 2009 $25,000 investment into Uber (then UberTaxi) with venture capital firm Sequoia Capital.

Approaching Funding as a Black Founder

Research is critical to Making your Fundraising a worthwhile and productive process. Be Prepared

After you already have a functional and scalable product, it helps to first analyze the funding patterns of other black owned start-ups. Who invested in them? Who passed up on the opportunity? At what rounds were investments made?

It's not that you need to follow their footsteps; but you should understand where opportunity may or may not exist. Also measure yourself against other companies and startups in your sector.

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"[Having good investors and/or board members are super important. I once had it explained to me this way: A good board member will help you avoid 3 mistakes per year...so by having 6 board members, you're looking at 18 mistakes being avoided by a founder and their team in a year]"

- Jason Calacanis, This Week In Startups

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Which investors are active in these spaces and with what results/reputations?

By doing your research on investors and talking to more veteran/successful founders, you will have a chance to understand what their personality types may be like, as well as their management and advisory styles.

How can they help you develop your product, find a market and grow the number of monthly active users?

The reality is that all money is not good money. So be diligent during your search for possible investors. Be educated about what you are giving them. And more importantly, be insistent upon what you need from them, which should be both dollars and sense.

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Medvis Jackson is a web designer at Hindsite, curator at Kulchah and avid cricket fan. You can follow him @medvisjackson for his random thoughts. He primarily covers startup, tech and small business ecosystems and resources.

#perspectives #troycarter