Introduction

On average, the cost to start a business is around $40,000 for the first year. While many founders will invest their savings in their startup idea and tap friends, family, or banks for loans, scaling a business often requires larger investments from angel investors or venture capitalists.

An angel investor is an individual investor who contributes their personal funds to a business, usually early-stage startups that come with higher risks but high growth potential. Angel investors offer capital, usually in exchange for equity.

A venture capitalist, or VC, is someone who offers a structured investment from a venture capital firm’s fund to startups with strong traction in exchange for equity in the business.

But how do you know whether to pursue funding from an angel investor or a VC? 

It turns out there are several factors that determine whether an angel investor versus a VC is right for your startup, such as how much funding you need, what stage your startup is in, what involvement level the investor has, equity expectations, and more.

Whether you’re just developing your idea or planning to scale internationally, this guide will walk you through how to find the right type of investor for your startup.

TL;DR: Choosing between angel investors and VCs

• Angel investors are individuals who invest personal funds ($10K-$500K) in early-stage, high-risk startups, offering faster decisions and mentorship but smaller check sizes and less structure.
• Venture capitalists (VCs) represent structured funds that invest larger amounts ($1M-$10M) in startups with proven traction, providing extensive networks and scaling support but requiring higher equity stakes and more formal processes.
• Choose angels if you're at idea-stage or pre-seed, need under $500K, have minimal traction, and prefer a hands-off, flexible relationship with faster funding decisions.
• Choose VCs if you're at seed stage or beyond, need over $1M, have strong metrics and user base, and can handle formal reporting requirements in exchange for significant scaling resources.
• You can work with both throughout your startup journey; many founders start with angel funding to develop their product, then transition to VC funding as they gain traction and need larger capital for growth.

Key differences between angels and VCs

Both angel investors and VCs offer capital to startups, typically in exchange for equity. While there can be some overlap in how and why angels and VCs invest and how they operate, there are some key differences between these types of investors. 

Typically, angel investors offer smaller amounts of funding from a personal funding source, but they are more likely to take on idea- and early-stage startups with higher risk. By comparison, VC fundraising trends show higher deal sizes but a focus on later-stage startups that have already proven metrics like traction and product-market fit.

Here are some of the major ways that angel investors and venture capitalists differ.

How it feels to work with an angel vs. a VC

While securing funding for a growing business is important, founders also need to consider the different styles they may encounter when working with angel investors versus venture capitalists.

Angel investors may send texts at strange hours or on weekends. This more personal, casual relationship makes it easy for an angel to even evolve into a mentor for your business. Angel investors may be available for faster feedback, but communications are likely to be less structured (unless you both agree to specific communication guidelines). Angels may be able to provide guidance and advice, but the relationship can be more casual compared to working with a VC.

Venture capitalists are investing on behalf of the VC firm, which means they are performing more like a business. This working relationship will feel more formal and structured. You can expect regular, scheduled meetings and to be responsible for providing updates by specific times. VC firms are often able to offer access to a wide range of resources and have a whole team available for support.

What investors expect from you (and when)

Investors do have some expectations they need to see before and after investing in your startup. These expectations vary based on the type of investor.

Angel investor expectations

Angel investors are willing to take on more risk, and many angels will even invest in startups at the idea-stage, meaning before you’ve built a minimum viable product (MVP). 

Angels tend to be more hands-off in the day-to-day activities and may not push you for faster growth or exit, but these investors do still expect frequent updates on your progress. Typically, your updates can be more casual and less polished when working with an angel; however, these guidelines can be established between you and the angel when you set up the funding terms.

Angel investors are willing to invest in high-risk, early-stage startups, but they also have high growth expectations. Many angels plan to make three to 10 times their initial investment within five to seven years, so they may push your startup for fast growth.

VC expectations

VCs must undergo due diligence to minimize risk for the firm, so this type of investment comes with higher expectations and tighter deadlines. This also means the process to receive funding can take longer.

Startups will need to prove traction by reaching certain fundraising benchmarks, such as customer count (1,000 to 20,000+ customers), year-over-year revenue growth (25% to 200%), or low monthly churn (2% to 6%).

You’ll want to start researching and building relationships with investors about 12 months before you plan to pitch. Then, it takes about three to eight months per round of VC funding to pitch, go through due diligence, and establish terms with the VC. VCs will expect regular updates on progress and may push for scaling faster.

Money isn’t the only thing investors bring

The deal size is a crucial consideration for a growing startup. To achieve major milestones, you may hope to secure more than $1M in funding; if you’re just getting started, $25K could help bridge the gap between your personal savings and the cost to start your business.

But the number on the check isn’t the only benefit that angels and VCs bring. Consider the following benefits:

• Angels: Deep domain experience, connections, emotional support, advice, higher risk appetite, retain more control
• VCs: Scaling support, hiring networks, future funding access, strategic oversight, less risk

When to choose one over the other

How do you know when to seek an angel investor or when to start pitching to VCs? Many different factors can help you make the decision. 

First, review the pros and cons of each type of investor to determine what level of control, type of structure, and timeline fits best with your startup goals. Then, consider common factors and scenarios that are better suited to each type of investor.

Pros and cons of angels vs. VCs

Factors to consider when choosing angel investors vs. VCs

From the stage and industry of your startup to your current metrics and goals, consider these major factors in deciding to pursue angel funding or VC investment.

• Stage: Early-stage startups, such as those at idea-stage or pre-seed, have more luck in gaining attention from angel investors for smaller sums of money, while startups at seed stage or Series A and beyond are better positioned for VC funding.

• Industry relevance: Both angels and VCs back startups in many different types of industries. Angels may gravitate toward startups in fields with high growth potential, like AI or health and life sciences. VCs are seeking lower-risk opportunities, with many backing startups in industries such as fintech and enterprise software.

• Growth goals: Big goals (such as expanding to global markets) require more funding. VCs manage funds and can offer higher funding amounts, so for startups that require higher amounts of capital to meet their goals, VCs may be a better choice.

• Traction: While any investor wants to make sure they are managing risk by backing strong startups, many VCs have stricter expectations for current traction and plans to scale. Angel investors may be more willing to invest in younger startups with less traction to show.

Choosing angel investors vs. venture capital

Every startup journey is unique, and only you will know when you’re ready to start nurturing relationships with potential angel investors or begin building a pitch deck to present to VCs. However, consider these scenarios to help guide your decision.

Can (and should) you work with both?

Now that you’ve weighed the differences in deal sizes, expectations, equity, and other factors, here’s some good news: you’ll likely want to work with both types of investors throughout the course of your startup journey.

Startups may tap funding from angel investors early on, such as to fund getting the business off the ground and developing a prototype. As you gain traction with help from angel investments, you can then begin preparing for VC fundraising.

Founders may also encounter angels in VC rounds. As you’re pitching for Series A funding and beyond, you may find both VCs and angels interested in investing in your business.

If you choose to incorporate multiple types of funding, keep your cap table front of mind. The more investors you bring into the fold, the more equity you’ll be giving away. Set a limit to how much ownership you’re willing to share in order to raise enough funding to meet your goals, then establish regular, clear communication guidelines for sharing updates and adhering to the startup vision and mission with stakeholders.

Final thoughts: it’s all about fit

Choosing an investor for your business comes down to who’s the right fit for your stage, work style, and goals. 

Early-stage startups that need smaller amounts of funding to get started and don’t mind a more casual structure are in a good position to work with angel investors. You can find angel investors with tools like the Angel Investment Network, AngelList, Angel Match, and LinkedIn.

For startups with a strong user base, traction, and ambitious goals that require substantial investments, it’s time to initiate the VC fundraising process. VCs come with more structure, a higher equity share, and a more formal relationship, but they also offer scaling support and huge networks. You can start researching VC investors using tools like Crunchbase, OpenVC, Dealroom, and PitchBook.

Be honest with yourself and investors about your goals, current metrics, and startup stage. If you’re too humble about your early success, you could short yourself on larger investments from VCs. But if you’re exaggerating your forecasts, you’ll be wasting time pitching for larger check sizes when an angel investor could be a better option to take you to the next level.

No matter which type of investor you choose, keep in mind that you’ll likely be in a partnership with your investors for several years. Make sure all parties align on the structure, communication expectations, equity, and vision for the startup.

When you’re ready to get started with fundraising, check out this session on How to: Raise Angel Investment as a First-Time Founder or this workshop on When and When Not to Raise Venture Capital. Or, explore more tips on startup fundraising in the HubSpot for Startups Fundraising Hub.

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