18 October 2021 | Startup

Angel Investors vs. Venture Capital vs. Micro VCs: What’s The Difference?

Raising capital as a startup can be terrifying, especially for first-time founders with no real experience pitching to firms or networking with angel investors.

But this does not mean it’s impossible to get your startup funded. It has never been easier to raise money because of the mass amount of resources at your disposal.

This guide will help you understand the difference between angel investors vs. venture capital, how they work, and decide what the best method to raise money for your startup is.

Table of contents:

What Is an Angel Investor?

Angel investors are wealthy individuals that use their own net worth to make an investment. They operate much differently than a venture capitalist and use longer time horizons when they make investments too.

These high-net-worth individuals make an investment into a small business or startup in exchange for equity. The cash injection is typically used as a way to fuel growth as either a one-time investment or ongoing support.

It’s not uncommon to hear of a startup raising angel investor money from family members and friends to get started by building product MVPs. However, this can often be broken into a separate funding round too.

Angel investors are most commonly used during an initial seed or pre-seed round for a company looking to raise capital for the first time. Because they are using their own personal money, angel investors prefer to be a part of the seed round because it gives them a clearer vision for exit in the future.

Depending on where you are in the startup journey, angel investors might be interested in working with you. But if you are an established startup looking for a new cash injection, the angel investing route is probably not the right one for you.

How Does Angel Investing Work?

Angel investors typically enter into the picture after the company has locked in an initial investment but needs more capital to begin growing the business. However, this is not always the case and it can vary.

This is why angel investors focus only on seed and pre-seed rounds because they can have a more direct path at seeing a return based on future possibilities of Series A funding, an IPO, or an acquisition.

The investment amounts can also widely vary based on the specific business, and equity available. Checks can be written for as low s $10,000 up to $1,000,000. It is not uncommon to see multiple angel investors join together in a syndicate to invest closer to the $1,000,000 sum into a startup.

Both syndicates and crowdfunding have continued to grow in popularity too. For example, Gumroad recently raised both an Angel Round and a Crowdfunding Round together to spur future growth with an injection of critical cash.

Gumroad allowed prominent angel investors, Naval Ravikant and Jason Fried, to both join forces and lead the angel round. In exchange, shares are issued to all investors based on a $100 million valuation.

Gumroad is not the first and certainly will not be the last startup to tap into syndicate angels and crowdfunding to lead successful angel seed rounds.

What Is A VC?

VCs are venture capitalists that operate much differently compared to angel investors. They provide capital to firms looking for high-growth investment opportunities. The key difference between a VC and an angel investor is that a VC operates as a team of individuals with pooled money from private investors.

A venture capital firm can be any firm or institution with sufficient cash, industry knowledge or both, that invests in new ventures and startups with the expectation of high growth and a future potential exit by acquisition or IPO.

A majority of venture capital investments come from larger, professionally managed firms but it is possible to also be an individual venture capitalist using your own net worth.

VCs also target startups at different stages compared to angel investors. Rather than finding companies in a seed round who are just getting started, VCs find established startups who need money to commercialize their idea to scale.

How Does Venture Capital Work?

Venture capital is an important part of the business world. It is a private equity source of funding for startups and other small businesses to give them a boost in their development and spark the commercialization of a product.

What Is a Micro VC?

Micro VCs follow a similar structure as a traditional VC in the way the firm is designed. However, the primary difference is the size of investments they make and the stage at which they get involved with a startup.

Micro VC firms look for startups during seed stages to keep a lower cost basis for more equity. By doing so, they can target startups that do not have enough capital to last until a Series A funding round.

While getting involved early carries more risk, the smaller investment size for larger equity shares makes it worthwhile for these firms. It lowers the number of successful startups they need to invest in to see profitable returns.

Micro VCs will build portfolios of smaller bets or get involved with larger rounds and get a small piece of the total fundraising round. The total fund sizes are usually less than $50 million in total investments of value.

These firms also almost always invest on the behalf of a 3rd party limited partner. This is essentially the same way a traditional VC works where capital is pooled into a fund and investments are made through partnerships to lessen risk and improve credibility.

How Does Micro Venture Capital Work?

It is not uncommon to see niche micro venture capital firms that focus on specific industries for investments. For example, LuneX Ventures focuses on investing in high-growth blockchain startups and cryptocurrency assets.

However, this is not necessary. Both SV Angel and Lowercase Capital are two of the larger Micro VC firms and they get involved in a much wider range of business types.

For example, a prominent startup that raised a very large seed round with the help of Micro VCs was Uber. At the time, they went by the name UberCab and the app still had not even launched yet. It was simply an idea to order cheaper drivers right from your phone. The same applies to another well-known startup in Dropbox.

What Are The Differences Between Angel Investors, VCs, And Micro VCs?

Investing in startups and new businesses requires risk tolerance because there is no guarantee that these investments will pan out. All three of these investor types take a significant risk when they write a check. But they differ in the way they approach investment opportunities with the goal of being profitable.

Angel Investors

Angel investors can either be accredited investors with a history in the industry or unaccredited individuals. All that matters is the amount of cash on hand ready to deploy into an investment.

Angel investments are typically under $1 million in total but it is possible to exceed this number if there are numerous angels forming a syndicate for investment.

Angels also always aim to get involved in only pre-seed and seed rounds. Larger Series A rounds take much more capital and require the assistance of VC or private equity firms.

When getting angel money, they will take a smaller percentage of equity too. The amount can range anywhere between 5% to 30% but could be smaller or larger depending on the specific scenario.

They also never seek operational voting power within your startup. They act as an advisor only when requested and simply inject cash into your business with no power over your startup.

Venture Capitalists

Venture capitalists use a much different structure where firms are formed with limited partnerships between people with expertise and money to make more in-depth investment decisions.

These investors are classified as institutional investors who write checks over $1 million. They also minimize risk by investing in more established startups looking to raise Series A (or higher) funding rounds with traction.

The equity size per investment can vary greatly from anywhere between 10% to 80%. Each investment opportunity is unique.

The reason that many startups fear getting involved with venture capital firms is the power they lose due to a larger share of equity along with granting operational voting power to a third-party firm that could take away their ability to make decisions.

However, as a startup grows it becomes vital to get venture capital funding to scale even further and faster.

Micro Venture Capitalists

Micro VCs are another reliable way to raise money if you are still in the seed stages of fundraising for your startup.

While you may end up losing more equity and operational voting power compared to an angel investor, it is not much of a difference overall.

Typically, micro VCs will co-fundraise startups together and write small checks but pooled together the fundraising amount is much larger. Like Uber, Airbnb similarly raised capital in the early stages of its growth.

Angel Investor Venture Capitalist Micro Venture Capitalist
Status Individual Institutional Institutional
Average Investment Size Less than $1m Over $1m $25K to $500K
Funding Round Pre-Seed & Seed Series A + Seed Stages
Equity Size 5% – 30% 10% – 80% 10% – 30%
Voting Interest Minimal Voting / Advisory Only Operational Voting Power Minimal Operational Voting Power

Who Should You Pitch To?

Before you are ready to pitch any investors, you should have everything about your startup perfectly aligned. For example, what is your revenue model? Are you profitable? How much capital do you need?

All of these questions and many more should be answered in-depth before you even think about seeking outside capital.

Chances are if you are reading this, you are in a seed round looking for your first or second fundraising rounds. This means you should be considering angel investors or Micro VCs as your best partners to make this dream a reality.

However, if you are the founder of a larger startup looking to launch a Series A round then you are ready to start talking to venture capital firms.

Only you will know where your startup stands, this guide is designed to lead you in the right direction and allow you to make an educated decision based on the options available to you.

Ready To Raise Capital?

If you think you’re ready to raise capital, it’s time to start putting together all of your company information. Meeting with angels and VCs requires plenty of financial data about your startup along with the company vision to sell why you will be successful.

Finmark can help you prepare your financials for investors, make projections, and put together information for all of your fundraising meetings and pitches. Sign up for a free 30-day trial today!

Anthony Cardillo

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Historically financial modeling has been hard, complicated, and inaccurate. But financials are the lifeblood of any company. They’re too important to be ignored or outsourced. They should be a core part of every founder’s job. This doesn’t have to be scary. And you don’t have to do it alone. The Finmark Blog is here to educate founders on key financial metrics, startup best practices, and everything else to give you the confidence to drive your business forward.

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