VC vs Angel Investor vs Strategic Partner – How do you decide? [Ask Your VC]
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VC vs an Angel Investor – how do you decide?
Taking money from VCs and angel investors isn’t an either-or proposition. Broadly speaking, angel investors can’t write large cheques whereas VCs prefer to. This means that you are more likely to receive angel interest early in your company’s development and VCs later in the game.
But back to this not being an either-or proposition: when I work with start-ups as an advisor, I strongly encourage them to evaluate their prospective investor from several viewpoints just as the investor evaluates start-ups from several viewpoints. Some things to keep in mind:
- Do you and the prospective investor share a common vision? Can you see this investor sticking by you in good times and bad? Do you have a strong personal relationship?
- Does this investor understand your business and industry?
- Does the investor’s expected level of involvement in the business coincide with your own? Some entrepreneurs want an investor to be closely involved with them, others just want a silent backer. Just make sure both your expectations are aligned.
- Does the investor’s exit timeline expectation align with your own?
- If you will most likely require more capital down the road, does having this investor on board help with that? Possibly the investor could keep funding you to profitability or they will bring other investors into that game. Of course, the likelihood of future fund-raising is ultimately linked to how well the company performs, not just having a strong backer.
You can come up with other points specific to your situation. Note that I leave valuation out of the list above. As long as you’re receiving a fair valuation, the above points are actually more important to early-stage companies.
VC vs a Strategic Partner – how do you decide?
I assume that “strategic partner” refers to a VC fund (or something similar) backed by a large corporation.
First figure out what you want from your investor. For some pointers, see my previous answer.
Next, be careful not to fall into the trap of dressing your company up specifically for one particular strategic investor. Some strategic investors can offer attractive business development or technology cooperation benefits. You should definitely take advantage of these benefits (which a VC can’t provide) — but don’t build your company only around this particular investor. Large companies start investment arms not only to make profitable investments but also to support their usually much larger main business. The main business is usually orders of magnitude more important to them than an investment in one start-up. If your company’s ultimate purpose happens to align with that larger purpose, it could be a happy ending all around. If not, make a Plan B (and C and D…).
Finally, realise that, if you intend to build your company to exit via a sale in future, having (only) a strategic investor could potentially complicate your exit. Your strategic investor’s competitors may perceive you as being part of a “rival family”. If they are approached in a sale situation, they may either shy away from taking a look at a “rival” or have a perception that your investor has washed his hands off your company. Your own investor may feel little compulsion to acquire your company outright.
None of this means that you should never accept money from strategic investors. My advice is that once you have decided to accept money from a particular strategic investor, you should balance out their influence by also raising money from at least one more financial investor, who will have a strong incentive to achieve a good outcome for the company that isn’t tied to a large company’s corporate priorities.
How does a founder identify a VC who may also be able to bring strategic inputs to the business?
Short answer: talk to them!
Longer answer: unfortunately, there is no neatly formatted, searchable database of investors who will tell you who you should approach. Instead, here is a non-exhaustive list of things you can do:
- Look at other start-ups in your industry in a related space and see who has funded them.
- Talk to other entrepreneurs and ask for their advice on who to approach.
- If you have already identified an investor and want to understand them a little before approaching them in person, speak to entrepreneurs they have funded in the past, focusing on entrepreneurs in your own industry, or ask your existing investors to make introductions to people they know and respect.
- Some investors will give you insights into how they think via their Twitter accounts, Quora answers, blogs and other such forums.