Angel Investors, VCs, Or A Family Office: How To Choose The Best Funding Route For Your Company
Entrepreneurs have a variety of options when it comes to securing funding for a new project.
In many ways, this is a good thing. The catch, though, is that each funding option is drastically different from the next, bearing its own cadre of advantages and disadvantages. Moreover, deciding which funding route makes the most sense for you and your startup will vary depending on your circumstances—what your short-term and long-term goals are, how much money you need, etc. And if you choose the wrong route, it can condemn your venture before it really even has a chance to get off the ground.
That’s why it pays to differentiate between these disparate strategies and their various components with scientific care.
That process starts with educating yourself around the characteristics of each lane. What follows is a primer to get you headed in the right direction:
Option 1: Angel Investor
- Advantages: Angel investors, among other things, promise shorter closing times along with a simpler overall due-diligence process. One reason why is that angel investors––who may or may not be accredited investors––are often familiar with the founders they partner with before investing in them. There’s a sort of informal element of trust baked in, especially compared with the work you may do with venture capitalists. Angel investors are often simply high net-worth individuals who want to make a return on their personal investments in you. Moreover, because angel investors are typically not full-time investors (they often have other jobs), they also tend not to interfere with your day-to-day, meaning they don’t demand too active a role in the company.
- Disadvantages: Because angel investors are themselves individuals––as opposed to members of investment institutions––the amount of money they can give you is typically smaller in comparison. Finding the right angel investor is also highly dependent on your ability to tap into the right personal networks; it’s not easy to approach someone you don’t know and get them to invest meaningfully in your business. Additionally, working with an angel investor likely won’t prepare you for the relatively rigorous process of raising money institutionally, which you likely will need to do later on if you scale. That means you may encounter challenges down the road that you were lulled into not expecting––a particular obstacle if you’re less disciplined with your money.
- Who should choose this route: If you’re trying to raise a small amount of capital––and want to do so quickly with few strings attached––this may be the option for you. Moreover, if you have a large personal network that you can tap into easily, this may be the easiest route. Finally, angel investors tend to be less aggressive in the terms they demand, so if you’re still building the value of your company and don’t want to give too much away––and if you don’t need help setting up governance structures and don’t want to bring on board members––this option proves relatively seamless.
Option 2: VCs
- Advantages: A proper, reputable VC can provide significant resources for you in the form of their experience and wisdom, along with the other companies and founders they work with in their portfolio. Which is to say, working with a VC can benefit you in ways beyond the cash. Additionally, VCs will help you identify and reach a specifically-targeted exit, as that’s what they align themselves and their resources towards. That’s what they have experience doing, and they can help you correct mistakes which might preclude you from positioning yourself for an exit.
- Disadvantages: VCs tend to be aggressive in the terms they set, partly because the good ones can justify demanding terms. But this is also a product of their model. VCs know that the best way to make money is by investing in a small army of startups with whom they stipulate these slightly abusive terms; mathematically, they know 80% of their investments will fizzle out. This illuminates another potential downside of working with a VC: some are not as strategic as they should be in their support or in their investments, meaning their learnings and supposed value-adds are sometimes not transferable. That’s why it’s so critical to vet VCs heavily before working with them. Make sure that the VCs you work with are equipped to give you advice, introductions, etc. Make sure they can provide, in other words, tangible value which justifies their relatively high cost.
- Who should choose this route: If your primary goal is a near-term exit, VCs can be a big help, as that’s their primary goal almost every time. But the good ones also possess a certain hard-won wisdom and business acumen that’s in a way intangible. They’re also equipped to provide you with larger investments than angel investors. If you need a lot of money and are prepared to go through a tough 4–6 month process, VCs may be your best bet.
Option 3: Family Office
- Advantages: A family office is a sort of hybrid between a VC and an angel investor. They can provide you with more cash than angels, yet typically not as much as institutional firms. What’s more unique about family offices is they tend to be more mission-driven and often have mandates where they focus their interests in specific industries. If you know what you need and what in-roads to take in your given industry, family offices can prove beneficial strategic partners.
- Disadvantages: Like an angel investor, working with a family office won’t prepare you for the large institutional round you’ll likely need to submit yourself to in the future if you keep growing. And in comparison to institutional outfits who can provide you with internal guidance and governance, family offices don’t actually add a ton of value beyond cash or industry-specific networking opportunities. Similarly, family offices are relatively unstructured in their process and approach––especially in comparison to VCs, who abide by strict, time-proven methodologies. This means the fidelity you expect from family offices can differ widely depending on the office.
- Who should choose this route: If you’re looking for the flexibility and casualness of an angel investor but want to receive a larger sum of cash, a family office partner might just be for you.
As you can see, making the right decision here depends primarily on your goals, your industry-specific needs, and the level of strategic intimacy you seek from your investors. That’s why, in addition to educating yourself around the differences which define each fundraising option, you also have to clearly identify what at the moment you and your company need in order to succeed.
Lastly, and perhaps most importantly, you also need to plan for time and rejection––a lot of it. Plan to contact at least 100 investors, as chances are, out of those 100, you’ll only end up having serious conversations with five.