Venture capitalist vs Angel investor - Inside the World of Startup Investing 101

byJoshCaleb

174 followers

5 years ago

A few months ago, I had the privilege of doing a business consulting to a group of semiretired medical practitioners looking for a venture capitalist and angel investor like me concerning their exit strategies. My firm is extremely private and only deals with highly secured and cross-referenced referrals.

We sat down to talk about what VCs are looking for in startups in 2020, and what pitfalls we avoid. I share surprising insights on what really captures a VC’s heart—and wallet.

For those who are green, let me quickly explain the difference between venture capitalists and angel investors.

If you look at the broad spectrum of investments, there are two main types—private and public. I focus on private-side investing—which would include venture capital and angel investment. On the public side of investment are stocks, ETFs, mutual funds, bonds, robo-investing, and the like, which I strongly avoid for so many decades and reasons. To each is own.

Angel investing is literally planting a seed and hoping that seed turns into a return of a thousand-fold (or more) on the initial capital. It’s the very earliest stage of a company’s existence. Naturally, it’s a higher risk and requires more work. But it can also mean higher rewards. Sometimes, small initial investments explode into something bigger. That kind of investing initially inspired me—specifically, the early investments made in business startups and real estate development. A word of wisdom, even God doesn’t build any more land.

I mentioned hard work—and that’s just as much on the investors as it is on the entrepreneur. As angel investor, I go out and do a lot of networking and scouting because the good startups don’t have time to go looking for investors. And when I find what I want to invest in, it’s like jumping off a cliff—and falling or rising with the winds of the company.

Venture capitalists are a bit different. These are investors who go to a startup after angel investors have helped get things running, then connects at the second or third round—or later—of investing. There’s less risk at this point because the company is more established and has some proven revenue.

Okay, so let’s pretend you’re an entrepreneur interested in launching your own startup. You know you have a great product and you ultimately want to scale, so you’re going to need investment from the outside. As a way of reverse-engineering this, how do you find the right investors?

I’m not plugging on any private investment or angel investor dotcoms, but you can certainly send your ideas there. Or you can connect to any of the investors you know in your network.

But if you want a more in-person approach, I recommend going to conferences in your niche. I always make a point to go to different ones and reach out to speakers and attendees. It’s the thought leaders that really grab my attention. And because I believe it is the hustle that makes entrepreneurs ultimately successful, I look for the highly ambitious, driven people. The ones that reach out to me—that make a point to connect.

Let me spell out the key points on business startup elements necessary for investment - 40% team, followed by various percentages of product, financials, and process. And then I start looking and hiring for a team.

Whatever product you may have—however great it is—a startup will only work because of the people. I’ve known that for a while and I wanted to put a number to it, hence the wealth management firms. I’m looking for a sense of purpose and personal investment in an idea. Plenty of startup founders are just interested in the acquisition—and the dollars that come with it. I want someone who’s in it for the long haul. They make the company successful, which is why I look at this above any other metric.

And what about the ideal product and what to look for there?

Building a product is not just about following trends or creating something that’s “hot.” It is about building a product that people love—that will keep them coming back to you time and time again. In other words, I want a product that build dependence and habit.

And process? That’s more about how you’re set up to scale.

What about marketing efforts? Surely that’s a big part of what I’m looking at.

More than marketing strategy itself, I’m looking for a story—a narrative, an icon. Think about the big business names you know. Those people had stories that they brought to the table, that made their companies and products relatable. If I don’t see that story, I’m not going to invest. If you have a story, the marketing follows.

Let’s say you have a space where you know you have a compelling story, a solid team, and a great product. How do you figure out how much money you need to raise? Don’t raise money unless you absolutely need to and you’re ready to grow.

The reason for that is actually very important. When you raise money, you are bringing in partners and their responsibilities. You need to grow the company the way you pitched it to them. Why? Because in exchange for investment you’re giving them common or preferred stock—part ownership in your company. So, they help steer the ship and you have less control.

Also, outside investment is basically putting you in debt, and you don’t want to take on that debt until you’re ready to scale and grow profits. I usually advise that when you finally put yourself out there for funding, you should look for 18 months period —just the monthly burn rate times 18. That’s not assuming any revenue. That’s just keeping the company moving.

An when I do take the dive as an investor, I go to the extent to get involved as a mentor and guide to the growth of the company. I become a serious advisor, spending 50-120 hours a month on that startup. I need to see the company through thick and thin.

In most cases, though, I hire great people to run the company while I remain incognito. As an entrepreneur that’s a MUST, at least for me. Being an INTRApreneur or working for yourself and your investment company usually has a tremendous downside. However, if you’re working on your own passive residual income streams, then I highly recommend you stay on the driver side and build your dream.

These days, you need to have a mission-drive business. If you aren’t trying to change the world for the better, one of three things will happen: You’ll create a moderately successful lifestyle business that never really grows; you won’t be able to hire people effectively and will eventually tank; or you will fail right out of the gates.

Go build something that you always wanted to build. This is your breakthrough period. It doesn’t matter if you have a full-time job right now. If you are tinkering with an idea, run with it. You want to look back in 20-30 years and be able to say you spent your life doing what you’re passionate about (making money). And sure, tomorrow will always seem like a better day to start. But it’s not. TODAY is your day. And you’re ALL you’ve got.