This article was first published on Shao-Ning’s Blog.
Who do I fundraise with? I thought to just share the key differences between these two distinct groups of investors, to help fund-seeking founders navigate the space better. This list is done with the Southeast Asian startup ecosystem in mind.
Who are they?
Venture Capitalists (VCs): The person(s) running the fund are called the General Partners (GP). There could be one or a few of them. Good GPs are experienced in fund management and/or exited entrepreneurs.
VCs are considered institutional investors and their business model are highly dependent on the success of their portfolio companies (aka their investments).
VCs are full-timers and usually have a full-time team to support their investments (analysts, researchers, admin support, etc)
Angels: High Networth Individuals, who are interested in investing in early-stage companies. They could be exited founders, corporate high flyers, successful business people, or family offices with a mandate to diversify their portfolio.
The most active angels tend to be entrepreneurs or retired business veterans. Another group of angels is the family or friends of the founders. They invest because they believe in the founders and their chosen path. This group can overlap with the earlier group.
Angels are “part-time” investors mostly, with full-time professional commitments or even full-time hobbies! They enjoy mentoring founders and assist in the growth and success of their “mentee” firms. Angels work alone, or with other like-minded angels.
Source of Funds
VCs raise money from High Networth Individuals, family offices, and/or institutional funds, and these fund contributors are referred to as Limited Partners (LPs) in the funds. Think of them as “shareholders” of the fund, and they are inactive in the investment process and fund management.
GPs themselves typically contribute 1-3% of the fund base so that they have skin in the game. A successful VC can be managing 2-3 active funds concurrently with another 2-3 funds fully invested.
Angels invest personal funds. Could be from their nest egg, exit outcome, or personal savings.
What does this mean: Angels tend to be more “personal” or even more “emotional” in their evaluations as the link between money and personal interest is very close.
VCs are a for-profit service business. They charge their LP 1.5-3% of the fund asset under management annually and a further 15-25% carry on the profits of the fund. The goal of most VC is to return more than 3 times the money put in by LPs after all fees.
The annual management fee pays for the running cost of the VC firm while the carry is the upside for the VC. The carry is usually shared among the GPs and other key employees of the VC management company.
(Do not mistake corporate venture players as VCs. They are a totally different breed of investors, with different interests and motivations.)
Angels: because it’s personal time and funds, the reasons angels invest are more varied. They include:
- Financial returns
- Paying it forward (with their checks + their experiences/time!!)
- Learning of new areas
- “Surrogate Entrepreneurship”
- Broaden their investments and diversification (they could also do this via being an LP of course; financially more costly and less time-consuming)
To further understand the psyche of angels, click here for an in-depth sharing of their thoughts and motivations.
Typical check sizes and % interests
Seed-stage VC checks are usually in the range of USD 300K to as high as 1M, depending on the sectors, in exchange for 10-30% of the startup shares. It’s quite common too for the early VCs to lead the round, with angels filling the rest of the round.
Direct angel cheque sizes could range from USD 10K to 200K for their initial checks. Some angels could band together to syndicate their investments too. In such cases, the quantum could go as high as 600K to even low millions.
Fund or Investment Mandates
VC: During the fund’s fundraising days, the GP(s) will share their intended investment target industries, and/or their fund philosophies. Investors would commit because they believe in the fund mandates and of course in the GPs who are leading the fund.
Angels: A structured and professional angel investor should have a good portfolio and diversification strategy. While some investors may prefer a specific sectoral investment focus (say they have insights in the chosen space or they are from the relevant fields), most angels adopt a more relaxed approach and are less rigid in their sector/space preferences.
For some angels, their startup investments could also be emotionally driven, due to certain life experiences they have had. Eg. their interest in biotech spaces because a loved one has gone through a negative experience and they realise the need to improve the space or need a better solution.
VCs: Usually 7 years, and could extend a further 1-3 years if need be. Active deployment of the fund is in the first 4-5 years of the fund life. And the remaining years the fund is in harvesting mode. Most VC will launch a new fund once the old one is mostly done with deploying.
Most of the funds need to exit their investments and return the capital + relevant profits to their LPs by the end of the fund life. So if you are discussing the investment with a VC in the early years of their funds, you will have more time to develop your business.
Angels: As the funds are personal funds, most angels can be more patient, with no specific exit timeline.
Besides money, what can founders get from them?
VCs: Typically the lead VC of the investment round would take a board seat in the startup board. In addition to providing governance as a board member, a good VC will spend time to strategise and review the company’s forward plan, and utilise its resources and network to help with the founders’ operation needs. More importantly at the next round fundraising, they could make good introductions to potential next round investors.
Angels: It really depends. Some angels could be really passive, especially if they are investing via a syndicate leveraging on other angels’ deal flow or expertise. There are also other angels who would roll up their sleeves and want to get really active with your business. It’s really important that you explicitly talk this out with your angel investors and understand the intention, expectations, and preferences. Read up more on how to manage your investors.
Typical Fundraising Making Processes
VCs: Usually the fund’s Associates or Analysts would be the first to review your investment deck. Very likely they would have seen other similar plays as yours, and they would have some background knowledge/research done already and would chat with you to get a stronger sense of both you and your company. Then they share their findings with either their Operation Partner or Investment Manager on what they find out about you and your space. If all looks good, you probably will be called in for another meeting or two or three more meetings here. Based on the outcome of these meetings, you may get a term sheet offer, which is a probational investment term. Due Diligence will then commence. With the Due D outcome, the information would then be put to the fund’s Investment Committee to finalise the decision. The whole process, from the first meeting to the final decision, could take 4-6 months at least.
Angels: The process tends to be simpler and more straightforward. But you should still ensure proper documentation is done to ensure accountability and clear investment terms.
With professional angels, there could be a few rounds of meetings, and also some due diligence work to be completed. For early-stage companies, there is not much to due-d frankly. So most of these review work is just to ensure that the key documentations are in place, no major discrepancies between what you have been sharing and what’s on your records.
What kind of return targets
Early-stage VCs aim for a 3-4x return on the entire fund. They expect usually to invest in 10-20 startups in each fund and they expect to have just a handful of successes. So each success needs to return at least 10x of what they put in. Eg. 15 investments, 5 successes where they make 10X each. The other 10 all fail. So the fund returns 2.5-3X to investors once we account for fees.
Angels: Again a structured and professional angel would have this mapped. Different angels have different investment philosophies and no one size fits all. Some angels may benchmark to VC returns. Others may be happy with a growing business that has a social impact and which pays out a dividend annually. What is key is that the Founders should explicitly communicate and understand the angels’ expectations right from the start to ensure a good relationship.
AngelCentral is one of the most active and fastest-growing angel investment networks in Singapore & Southeast Asia. We organize regular angel investment workshops, curated startup pitch sessions, and provide syndication services.
If you would like to find out more about Angel Investing and what AngelCentral does, come for our coffee chat session. These informal chat sessions are held twice monthly where we will share about what we do, our membership offers, and/or what is Angel Investing all about. Due to COVID-19, our coffee chats have moved online! Secure your slots here. Register here if you are only available in 2021!