YOU Can Avoid the WRONG Investor | Choose Wisely

What's the difference between angel and venture capital investors? It's a great question and one that came in from one of my YouTube viewers, JGIG7284, thank you, on YouTube. And it's really important. I remember when I had my first business, I felt like I needed help and I felt like I needed funding and I didn't know if I needed to go to an angel investor or venture capital. I didn't know how much money they wanted to spend. They didn't know who would be a good fit for me. And the problem is, if you don't know the difference and if you don't know who you should bring on, it could not only waste your time— like, raising capital is almost a full-time job for your business, and so you don't want to spend your time going in the wrong direction— but also bringing on the wrong person can really sink your company. Raising money really is like getting married. You have to really pick who you bring on. Because again, the wrong person could destroy your company. And everything that you've worked so hard to build, the vision, everything that you believe in, could be torn apart because you brought the wrong person on board. So really tread carefully and do your homework. So here are the main differences. An angel investor is an individual. They're one person. They either do it as a profession, so they are a professional angel investor. They're sophisticated. They'd like investing in the companies as their main business. But there's also a lot of people who are not professional, who are unsophisticated, who have no idea what they're doing. They're wealthy individuals. There's an industry term called DDI, which is doctors or dentists with disposable income. A lot of these angel investors are like dentists who hate their lives, who don't find satisfaction in their, in their career anymore, and they invest in companies as a way to tell their friends about the things that they're doing and, and live an exciting life through you. They're not professional investors. And so angels are all over the map and you really want to do your homework to find the ones that will give you not just money, but connections, experience, ideas, wisdom beyond that. You never want to bring on money just for money. You need somebody who can bring more to the table and also who believes in what you're trying to do. They don't just see an opportunity to make cash, but they believe that the change that you're trying to make in this world is a good one. It's super important. Typically, angel investors do have a higher tolerance for risk. They are looking at a longer horizon, typically 5 to 8 years before they're gonna get their money back. So they're, they're in it more for the long term. And if you're looking at raising less than half a million dollars for your business, then you're probably dealing in the angel investor territory. So the angels are the, the first capital to get you going. It could also be your friends and family or your own startup money. But if you're going for like a professional investor, then you're going after an angel if you need half a million dollars or less. The next step up is looking at VCs, and venture capitalists typically will look at half a million dollars plus. The reason is it's the same amount of work to do a $15 million deal as a half a million dollar deal. And so VCs don't like to spend their time working on these small deals because the payoff isn't there. They'll only do it if they really see a lot of opportunity with the company and they'll be involved in future rounds. So they'll work with you on a small scale because they think they can take you through a couple rounds of financing. And by getting in with you early, then they'll— you'll want to go back with them. You know, they're getting their foot in the door at the start. Typically VCs don't like startup companies, pure startup. It's really, really hard to get them. They want to see some momentum with your business, some traction. They want to see a little bit of revenue at least to show that, hey, you've done it this far with some money, you can go beyond. Typically they're looking at a shorter horizon, so they want 3 to 5 years and they're going to exit. They'll never invest to buy out another investor. So if you had a really bad angel investor and now you're trying to raise more money to buy out that angel, they're not going to do it. This is why it's important, right? You get the wrong investor, they're stuck with you forever. It's really, really, really hard to get rid of them and nobody's going to want to come in just to buy them out. With VCs, they want to see that there's a clear exit strategy. So the two most common ones are you're going to go public. So there's a, there's an IPO, your company goes public. Or you get acquired. So some big company is going to buy you up and pay you a good price for it. The third less common one is a management buyout. So you buy back the shares from the VCs, but they don't want to see that. They want to see massive growth. They want to see that you're going to go out and build something humongous, make tons of money, and somebody's going to want to buy you up. VCs are professional. They pool money, so they have people who give them money and then they're in charge of, uh, going out and investing it. And they typically focus on specific areas. Angels are all over the map. Again, some will invest in an area that they have expertise in, and others will just invest because they think they can make money. But with VCs, they're usually really targeted. So they want to see a tech company, or they want to see a green company, or whatever it is. They have specific criteria that they're looking for. VCs are looking to make 30% a year return on their investment. And it's not gonna come in the first year, second year, but by the time they exit after 3 to 5 years, they wanna see that they've made 30% per year on their investment. So you have to have a type of company that will grow that quickly. Where angels, they wanna make money, but it's not as set, right? So they may invest in something that they believe in personally, they have some kind of affinity with, but it's not gonna yield as big a return. Because they like it and they're okay with a lesser return. Maybe there's more safety to it, where VC wants to see massive rapid growth. And so it lends itself to software companies, to technology companies, because it's easier to scale those types of businesses. Where if you look at a consulting business, for example, a VC wouldn't touch that because it's, it's too hard to scale quickly. The returns aren't there. Where an angel investor might invest in that kind of business because they see a way to make a little bit of money and they may believe strongly in what you're doing. So hopefully that helps. Those are some of the main differences. Again, when you are looking at raising funds, I would start by thinking about how much money do you need. And the half a million dollars is a good mark. If it's less, you're looking at an angel. If it's more, you're looking at a VC. But really scrutinize the person that you're bringing on Because I know it's exciting to get money, right? I know it's exciting. Finally, somebody believes in us. Finally, we're able to rapidly grow this thing up. You know, you've been struggling and grinding it out and, and just making ends meet and not paying yourself very well. And finally, somebody believes in you. There's so much excitement around that, but it's easy to get locked into a bad deal. Everybody's on their best behavior when things are going well, especially at the beginning. But when things get rough, which they're gonna get rough with your business, you need to have somebody there who will still support you, who will really still believe in what you're trying to do with your business. And so I just urge you to scrutinize strongly everybody that you're bringing on as a potential partner or investor into your business, because if you do make the wrong decision, it could really sink your company. They need to be bringing more to the table than just money. They need to believe in your business and they need to have some kind of expertise that they can share or contacts, experience, something that helps your business grow beyond just the money. Great question. I hope that helped. For those of you watching, you like the video, please give it a thumbs up below. It always makes me want to do more for you guys. And I'd love to hear what you think. Please leave a comment underneath. Let me know what you're thinking about this video. And if you want me to do a video response for you, you have a business problem, leave it below, I'll create a video. Thank you guys, I'll see you soon.