Pitching your MVP to traditional Venture Capital funds without any customers in place won't fly, and approaching an Angel Investor for $120M prior to going public won't get you anywhere.
Don't waste time pitching to the wrong investors because you approached them at the wrong fundraising round.
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The first step of Investor Due Diligence is identifying what type of investor you should be pitching to.
From Angels to Venture Capitalists and Private Equity, we'll give you a breakdown of the differences between these types of tech and startup investors.
A Snapshot
Angel Investors: Pre-Seed & Seed Fundraising Rounds
When I: have an idea, MVP, or few / no customers.
Venture Capitalists (VCs): Series A, B, C, D+ Fundraising Rounds
When I: am growing my product & company and have customers.
Private Equity (PE Funds): Mature Companies
When I: am pretty established and/or ready to IPO.
Investor Bios
Angel Investors:
Angel Investors are wealthy (accredited) individuals who invest their own money or pool their money with other Angels into a variety of different startups.
Venture Capitalists (VCs):
Venture Capitalists are employees (GPs) of a VC Fund and invest others (LPs) wealth. General Partners (GPs) are the investors managing the fund. Limited Partners (LPs) are the individual investors and can be wealthy family trusts, endowments, corporate pension funds, sovereign wealth funds, or funds of funds. GPs make money from Carry (the money post-profit back to LPs) & Management Fees. Understanding this relationship is important.
Private Equity Funds (PE):
Private Equity Funds are a group of investors making a direct investment in an established, not-public-yet company. Like VCs, PE Funds have LPs. Private Equity Funds do not typically invest in startups like Venture Capitalists and Angel Investors. PEs invest in a wide range of industries & verticals (not just scaling tech like VCs and Angels).
Company Stage
Angel Investors:
Angel Investors invest in the early stages of a startup (Pre-Seed & Seed). They will support your idea or MVP, even when you have few or no customers.
Venture Capitalists (VCs):
VCs invest in companies that have a product or technology that is working and has customers. They are there to help your startup grow and scale.
You usually fundraise from Venture Capitalists after you've raised from Angels. Some founders skip early funding through bootstrapping & family/friends or personal investment.
Private Equity Funds (PE):
Private Equity funds invest in established or mature companies. They come in after VC money, and often when a large business is struggling due to leadership or operations.
Check Size & Total Ask / Round Size
A note on investment size: this varies with each industry & vertical. A MedTech Device Seed can be $20M, while a SaaS Seed can be $500K. If you are curious about how much to raise or ask for, we're here to help. A good rule of thumb is to request 18-24 months of runway and round up to the nearest 100K for Seed or nearest $1M for Series A+. You should also do a bit of competitive & industry analysis to get an idea of what typical check & round sizes look like for your industry.
Angel Investors:
Angel Investors invest in early-stage rounds, which are smaller than growth-stage rounds. A Seed or Pre-Seed total round is usually just under $1M and up to $5M. Angel Investors will usually invest anywhere from $5K to $500K per investment round, so you may have multiple investors through a syndicate or Angel group to help close your total round.
Venture Capitalists (VCs):
VCs are investing in growth-stage companies, meaning your round may be larger as a result of product development, employee/team scaling, sales & marketing, and other overhead. Growth-stage rounds start at $5M but can be quite large (upwards of $100M), depending on the round & industry. An average VC Fund investment in a round is $7M (some data shows $11M), but will vary according to your round (A, B, C, D+) and industry.
Private Equity Funds (PE):
Private Equity checks are much larger ($100M+), since they are investing in large, established companies. An LBO (Leveraged Buyout) is a common deal type with PEs. An LBO happens when an investor buys a majority stake in a company with a combination of equity and debt. While the debt must be repaid by the company, the investor will improve the business in the meantime to ensure the debt repayment is less of a financial burden.
Investment Strategy
Angel Investors:
Angel Investors have more flexibility in who they invest in and how because they are investing their personal money. Some Angels have a general investment thesis, but many don't. Most will invest in industries they have strong expertise in, especially if they are a former founder/CEO.
Angels expect ROI (return on investment) through: net earnings / profit, or when a company exits via IPO or an M&A (merger and acquisition) deal. They typically like a return of 3-5x (some say 5-10x).
Because Angels are investing early, they are taking a higher risk and may require larger equity, a board seat, a discount on additional shares in future rounds, and/or convertible note terms. Their checks may also come a bit quicker to you because they are investing their personal money.
Venture Capitalists (VCs):
Venture Capitalists have a fund thesis and a fiduciary responsibility to their LPs. This means less flexibility on how they invest and how quickly a term sheet may be signed & sealed with a check. A fund thesis will drive what type of company a fund will invest in and often includes key metrics a startup must meet.
VCs are looking for companies with solid traction and ready to scale (quickly) in large markets.
VCs expect their portfolio companies to exit, either through an M&A deal (Merger & Acquisition) or an IPO (Initial Public Offering). They also like to see a 5x-10x return (some say 10x minimum).
Because VCs are investing larger check sizes, they may have a heavier hand than Angels in your operations, marketing, and business development. Venture Capital funds bring a solid network of experts, potential clients, and other portfolio companies who can help grow your company.
Private Equity Funds (PE):
PE Investors may flip a business: purchase the company, improve the operations, and then exit the company for profit (usually through a sale).
Private Equity Investors write larger checks and require a majority stake in the company, giving them significant say in major decisions of a company. PE Funds can completely overhaul a business' operations and leadership if they see fit. They can also sell a company.
Risk & Reward
Angel Investors:
Angel Investors are investing earlier, and as a result, taking a higher risk on you. Angels write smaller checks, but the terms & checks can come to you faster (often at a crucial time to build) because the investment is their own.
You pitch your idea or MVP (Minimally Viable Product) to Angels at the earliest stages of your company (or idea), even if you have no or few customers.
Most Angels will take a large equity stake, a board seat, convertible note terms, and/or request a discount to purchase additional shares on your next round(s).
Angel Investors make some of the best overall advisors, especially ones that have grown and exited their own company.
Venture Capitalists (VCs):
Venture Capitalists (VCs) invest in growth, so you must have traction and a working product. VCs write larger checks and expect a higher ROI. Because funds have LPs and a thesis, the investment decisions will be made with higher due diligence & checks/term sheets may come to you less quickly than from an individual Angel.
You pitch your startup's business model, revenue projections, and growth strategy to Venture Capitalists. VCs are there to help you scale your company from a few employees to a large operation.
VC Funds have a solid network of experts, potential clients, and other portfolio companies that can help you grow & develop your startup. VCs make some of the best growth & strategy advisors and can help you fill in any expertise gaps in your company.
Private Equity Funds (PE):
Because PEs are coming in at a much later stage, their ROI and risk are both lower. Private Equity Funds often invest in large businesses that are struggling or have become stagnant.
PE Investors are given a majority stake, so they can easily sell your company to make a profit.
With Private Equity investments, you have more cash and strong expertise to flip your business, this can be extra helpful if your company is in a rut.
