6 months ago if you would have asked me this question, I would have said to take any money that comes your way. Hahaha, how things can change so quickly.
Don’t get me wrong, startups and fundraising are difficult, but I can now see a much clearer picture of what an investor looks for in a startup. During the past month, I’ve met with 12 investors, each with a modest to high interest to invest in RewardMe.
The question is no longer, “Can we raise money?” but rather, “Who are we going to raise money from?”
Who should read this post: A founder that is in the middle of raising a round of capital for his or her startup
What you will learn: How to make the critical decision of who to take money from
We have already raised $100K on a convertible note from our personal networks – this is great because we did not price the round and it allows us to increase our valuation in anticipation to a Series A round from a VC.
With our upcoming round approaching, we have to decide to raise angel money or VC money. Below you will find details that will help you make your decision when the time comes:
Typical deal size: $50K – $1M
Who are angels: Angels are wealthy individuals who use their personal money to invest in a startup. They invest for several reasons:
- They want to relive the joys of the startup
- They want to help other entrepreneurs reach their dreams
- They’re looking to make money on a successful investment (of course)
Goals for an angel: Since Angels usually invest smaller rounds, they’re looking for a quick exit – perhaps an exit between 3-5 years.
Closing speed: Moderate – Fast. Expect 1-3 months for a close.
Why raise angel money: In my experience, Angels are hands-off investors that will work hard to support your company. What I mean by “hands-off” is that they won’t replace the current CEO with a CEO of their choosing, pressure you to change business models to make money immediately, pressure you to sell quickly to use the money for another startup, or try to exert force over the startup.
I have seen all of the above examples happen in a VC funded startup.
Angels usually invest less than a million, but also take significantly less equity. Angel money is a great way to prove your concept, gain traction, and up your valuation to prepare for future rounds of funding. Heck, most internet startups require such low capital that you may not need to raise another round after an Angel round.
Conclusion: If you can hit your milestones, prove your concept, and capture market with less that $1M, then you should raise Angel money.
Venture Capital (Series A)
Typical deal size: $1M – $15M
Who are VC’s: VC’s are professional investors. They raise money from wealthy professionals and companies that they use to invest in startups. The sole purpose of a VC is to invest in a hugely successful business that will return billions.
Goals for a VC: VC’s invest with the understanding that 8 out of 10 of their investments will fail; 1 will be a small success; 1 will be a HUGE success that will make them lots of money. They look for the BIG EXIT or the IPO – not the quick sell.
Closing speed: VC’s do a ton of due diligence. Once you’ve caught their interest, expect the round to close between 3-5 months.
Why raise VC money: VC’s do this for a living – they have the experience, the capital, the network, and the resources to help their investment succeed; notice how I said “the investment” and not “the entrepreneur”. When you need a butt load of capital to scale your company, then VC money is the way to go.
However, all these benefits come with a price. VC’s usually take a significant portion of your equity and have decision-making powers: they can replace a founder; they can change your business model; they can force you to sell the company or prevent you from selling the company.
Conclusion: If VC’s have an interest in your startup, then it means you have a great business in a hot market. Use VC money if you need millions to scale quickly and capture the market.
The next question is, “How do I get investors interested in me in the first place?” If you guys are interested, I’ll write a blog post about it this week. All we did was change 1 element of our startup and we went from 0 interested investors to 12 interested investors.
Keep working hard and I promise you’ll get lucky!!!