Question: What do VC's offer that an angel or institutional investor can't?
My colleague Adam Koopersmith did a nice job addressing the question of VC Firms vs. Angel Groups for financing in an earlier post (Ask A VC 12/2/12). While angel groups are a grouping of individual angels investing together versus one independently, there are still many relevant lessons that can be learned in that post (so I will not replicate all of them here in depth).
At a high level, the similarities and differences between angels and VC funds will vary on a case by case basis. An entrepreneur may want to start by focusing on the following factors (I will offer what I believe are the two most important, and let you determine which one is the single most important to you - each individual’s situation is different):
Current and follow on financing capability: For larger rounds (say over $1-2M), angels may not have deep enough pockets to fill out the round. Or, one can pull together an array of angels but will have too many investors to manage. Additionally, if the company requires significant capital later, it will need a deeper pocketed investor or one that has a broad rolodex to introduce them to other investors for the next round. Also, if a term sheet is needed, a VC will generally have more comfort in setting terms/structure and leading a larger round.
Domain experience: While some angels have industry experience in the business they are investing in, that is not always the situation. Pattern recognition will be helpful to the entrepreneur, as they engage with their investors. As Adam noted, many VC funds will have the benefit of multiple investments in the same sector, which results in historical perspectives and potential introductions to relevant advisors/management team hires in the future. Additionally, VC's are usually able to appreciate the ups and downs of the entrepreneur's journey and handle setbacks more readily having seen them before.
Other factors which I would encourage any entrepreneur to consider from Adam’s post - branding/credibility affiliated with the investor, ability of the investor to stress test your business, and implications of signaling.
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