Don’t chase VCs when you should be looking for angels

At some point in your startup-building quest, you may decide to raise capital to help you get to the next stage of your journey. 

Like most founders, you may have bootstrapped the building of your startup to a certain point and are now looking for an injection of funds to take things to the next level. 

But, like many milestones on a startup’s pathway, raising capital is much easier said than done. 

The way you go about it can also have major implications for the success of your startup and how smooth or bumpy the ride turns out to be.

There are two main methods of what is called “equity financing” when it comes to raising capital – angel investment and venture capitalist investment. 

Equity financing is when a company raises capital by selling shares of company stock. This means you’re effectively selling off small pieces of company ownership.

A big problem we observe with founders seeking equity financing is that they often don’t know who to prioritise talking to first when it comes to finding an aligned investor that best fits the needs of their startup. 

This is one of the biggest challenges a founder can face on their startup-building journey.

Sometimes, a founder will receive initial investment from friends and family members or from crowdfunding, but these methods have their limits. 

Involving personal networks comes with its own risks. 

Founders, therefore, commonly find themselves trying to work out what events and networking opportunities they can attend to meet potential VC and angel investors who would understand and believe in their idea, and ultimately, be willing to back it. 

When they go to these founder/investor events, however, they are often much more likely to meet venture capitalists than angel investors. 

This is a conundrum, as angel investment is almost certainly what they are going to need for their pre-seed or seed-round funding. 

Here’s why.

Venture capitalists and angel investors have fundamentally different drivers behind their investment actions.

VCs are professional investors driven by the number-one goal of getting a good return for the limited partners who put money into their venture capital fund. 

It’s not all VCs, but there’s a clear tendency from VCs globally to compromise on best practices for what the startups they invest in should really be doing to succeed – because the startup is not their customer (the LP is). 

What this typically looks like is pressuring startups to rush a product to market in a bid to get earlier returns for LPs, and in doing so, rushing the wrong product to market (because not enough systematic research and testing was done to validate that the right product was being built). 

Startups backed by VCs are often not supported in managing the innovation risk associated with building something new.

The VC model simply doesn’t allow for it as they’re focused on picking the winners for their investors.

VCs often operate with the “build it and they will come” ideology that underpins so much startup failure. 

What’s more, VCs typically want to invest in late seed or Series A funding rounds and not earlier. 

This pushes product-build (pressure) into early seed and pre-seed stages as founders are often told they need to have a product before they can get investment. 

This steers startups towards building the wrong product of their own accord.  

Angel investors, on the other hand, are much more flexible. 

These are high-net-worth individuals often seeking to enjoy the experience just as much as they’re looking to make money. 

The “active angels” (the ones who will have active input into the startups they invest in) are often driven by social impact and developing founders, which means they care as much as the founders do about getting the right product to market (and not just for the returns they’ll get). 

“Passive angels” are investors that don’t have active involvement in the startup’s journey, but see the value in including startups in their investment portfolio (or who may have an interest in the area that a particular startup is solving a problem in). 

As an early-stage founder, you’re much better off working with an angel who understands the startup-building journey and provides “patient capital” (i.e. does not try to rush you to market too soon).  

After all, it’s not the first to market that matters – it’s the first to Product-Market Fit

The natural next question, then, is: How can founders meet angel investors? 

There’s no denying that having a strong business and community network is your most valuable asset here. 

However, there are dedicated “angel groups” in many cities that have a monthly meeting where they’ll allow, for example, two to five startup pitches each month. 

There are also Family Offices that generally manage money for a wealthy family and will often employ a professional investment manager to do this. 

Getting introductions to these types of individuals will be fundamental to your capital-raising success, and what’s most important is to manage your expectations on how much time it’s likely to take. 

It’s imperative to start your capital-raising campaign long before you think you should. 

Starting earlier also means you’re more likely to conduct your approach in another important way, which is to “pitch for relationships” before “pitching for capital.” 

Every time you meet with an investor, it’s an opportunity to practice your story, learn what language resonates, and find out what possible objections there may be to your business model hypothesis. 

Each one of these meetings and new relationships is highly valuable as you’ll use the information you take away from each one to hone the pitch deck you’ll deploy when you do start pitching for capital.  

If you’re building a startup and you’re ready to create the pitch deck you’ll use to raise capital, but you’re not sure how to go about it, we can help.

Fill out this short questionnaire to tell us about your situation, and we’ll get in touch with your next steps.

 

Whenever you’re ready, here’s how we can help you.

If you’ve got a startup idea, or you’ve already embarked on your journey – you might be facing one or both of these situations.

  1. You’re struggling while going it alone. Worse, you’re wading in the muddy waters of some not-so-great advice.
  2. Perhaps you’re trying to raise capital for your startup and you’re hitting a dead end. Raising capital is a notoriously difficult thing to do. Globally, only 0.74% of startups manage to raise capital at Seed stage. Despite this, 16% of startups we’ve worked with were able to raise capital at Seed stage.

If you’re ready to step up and get the help you need, our Startup Builder™ program was created especially for you.

The Startup Builder™ process is specifically designed to take you all the way from idea to global success – in a way that’s simple, sustainable, and scalable.

If you’re ready to grow your revenue, profit, and social impact faster without wasting time and money on the wrong things at the wrong time, click here to request your Startup Builder™ Strategy Session.

 

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