Dan Martell - December 07, 2020


Angel Investors VS Venture Capitalists - Which One Is Right For You？


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Length

10 minutes

Words per minute

191.31793

Word count

2,042

Sentence count

121

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1

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Summary

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In this episode, Dan Martell talks about the difference between an angel investor and a venture capitalist and how to understand the difference so you can make better decisions when raising money for your SaaS startup. He also talks about why they are different and why you should know the difference.

Transcript

Transcript generated with Whisper (turbo).
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00:00:00.000 Hi there, Dan Martell here,
00:00:01.140 serial entrepreneur, investor, and creator of SaaS Academy.
00:00:03.260 In this episode, I'm gonna share with you
00:00:04.640 the difference between angel investor
00:00:06.940 and venture capitalists.
00:00:09.240 Super important to know
00:00:10.140 because both of them will give you money,
00:00:12.360 but completely different experiences
00:00:14.240 if you don't understand what motivates each one of them.
00:00:17.620 Be sure to stay at the end
00:00:18.420 because I'm gonna share with you
00:00:19.380 how to get access to my fundraising
00:00:21.080 like a pro training, absolutely free.
00:00:24.240 It's literally responsible for helping startup founders
00:00:26.920 just like yourself, raise, you know, 50K in seed funding,
00:00:30.500 up to 20 million in venture capitalists total.
00:00:33.440 I've helped people raise over 400 million
00:00:35.120 using that framework.
00:00:36.160 I'll share with that later.
00:00:37.340 Let's get into it.
00:00:50.780 So the first time I ever raised money was back in 2009
00:00:54.460 and I raised about 750K for my company Flowtown.
00:00:58.540 And this was like after building three companies.
00:01:01.760 One, I bootstrapped and exited myself
00:01:04.000 and I thought, oh, it's gonna be easy.
00:01:06.000 I wanted to learn how to raise capital.
00:01:07.700 And trust me, it was a completely different experience
00:01:10.920 than what I thought I would set out to do.
00:01:13.780 And it was a lot harder
00:01:14.820 and had a lot of people kind of laugh at our terms.
00:01:17.980 I didn't understand what some of the things
00:01:19.620 they were saying meant.
00:01:21.120 And eventually I got it done
00:01:22.420 and then I did it again with clarity.
00:01:23.720 And the fun part for me is I've helped a lot of SaaS founders
00:01:26.760 out there raise capital.
00:01:28.440 Many of them have been bootstrapped to a certain level
00:01:31.180 and they wanted to raise some angel
00:01:32.600 just to help with some development.
00:01:34.440 Others wanted to go VC round
00:01:36.060 because they wanted to kind of really pour some gas
00:01:39.800 on their fire.
00:01:41.060 So what I wanna share with you today
00:01:42.660 is what I teach my coaching clients,
00:01:44.180 which is how to understand both
00:01:45.760 because both of them seem the same on the outside,
00:01:49.400 but when you dive in, they're completely different
00:01:52.060 and understanding those differences
00:01:53.500 will help you avoid raising money from the wrong people
00:01:56.440 with the wrong expectations
00:01:57.540 and really creating road bumps or speed bumps
00:02:00.880 or roadblocks in your SaaS business.
00:02:03.260 Let's dive into this.
00:02:04.400 Number one, source of money.
00:02:06.500 Where does the money come from?
00:02:07.740 Well, the good news is I can tell you, angel investors.
00:02:11.620 I've invested as an angel investor in 40 different companies.
00:02:15.460 Oh, now even more,
00:02:16.620 because I'm doing about one a quarter.
00:02:18.240 So angel investing is the individual taking their money
00:02:22.600 and investing, buying private stock in companies.
00:02:25.720 And that's how angels source of capital comes.
00:02:28.700 Usually they've done something in the past.
00:02:30.220 They have a business.
00:02:31.440 They're high net worth people.
00:02:32.360 They're definitely high net worth people
00:02:33.340 because it's illegal, I think, for the most part
00:02:35.200 to invest in private companies to take stock
00:02:38.600 without being a credit investor.
00:02:41.260 So that's the angel side.
00:02:43.420 The VCs, which I find fascinating,
00:02:45.440 they raise from other investors,
00:02:48.040 sometimes called the limited partner.
00:02:49.820 So usually the person who starts the venture firm
00:02:52.080 or the fund, they're called the general partner, the GP.
00:02:55.280 And then the LPs are their limited partners.
00:02:57.120 They're the source of money.
00:02:59.300 And the reason why I find it fascinating
00:03:01.500 is because if you think about it,
00:03:03.820 VCs are just like entrepreneurs
00:03:05.880 in the sense that they have to go raise money too
00:03:07.820 to fund their VC firm.
00:03:10.400 Just like you're going out there
00:03:11.660 and maybe asking people for money,
00:03:13.340 they did the same thing.
00:03:14.840 So they, you know, it's kind of neat
00:03:16.900 that they have to feel the same rejection,
00:03:19.320 do the same pitches and try to get people excited
00:03:21.560 about their business.
00:03:23.000 But those are the main differences.
00:03:24.880 Angel, it's their money.
00:03:25.840 VC, it's other people's money.
00:03:27.400 Number two, investment thesis.
00:03:29.860 So when it comes to angels over here,
00:03:32.520 angels, I would say,
00:03:33.880 because I've done a ton of investments,
00:03:36.020 I do it for the fun.
00:03:37.260 I do it to learn.
00:03:38.320 I do it, yes, I wanna make money.
00:03:39.960 It has to generate a return.
00:03:41.640 But for most angels,
00:03:43.400 they do it as almost a way to give back.
00:03:46.700 They do it as a way to learn faster.
00:03:49.980 and they do it in a way to essentially create
00:03:53.220 a portfolio of companies that are high growth
00:03:56.260 because they're busy typically
00:03:57.640 with their primary income business
00:03:59.360 and they just wanna have fun.
00:04:01.200 That is the investment thesis.
00:04:02.800 There's no magic to it.
00:04:04.620 They're just like, hey, I've got this extra capital set aside.
00:04:07.500 I wanna be involved in more startups
00:04:09.460 and aligning my money and my time and my advice
00:04:12.920 sounds like a really good time.
00:04:14.580 And that's what Angel's investment thesis look like.
00:04:16.800 VCs, however, their thesis or ideas around investing
00:04:21.080 is very specific.
00:04:22.040 Typically when they raise their fund, their pool of money,
00:04:25.080 they're saying to their investors or limited partners that,
00:04:28.640 hey, I think there's this opportunity in,
00:04:31.040 you know, let's say work B2B SaaS.
00:04:33.680 So stuff that helps the new distributed workforce.
00:04:36.360 There's this new trend in the market, Bitcoin SaaS,
00:04:39.820 drone SaaS, artificial intelligence and big data.
00:04:42.800 There's some kind of specific thesis
00:04:45.120 that they've seen their pitching to their investors
00:04:48.140 to raise the money.
00:04:48.980 So when they're looking at deals,
00:04:50.420 they will have a preference.
00:04:51.820 So you just need to make sure
00:04:52.660 that you're talking to the right people.
00:04:54.480 If it's just a high net worth person,
00:04:56.400 they're just looking to make money, have some fun,
00:04:58.080 learn some stuff from really young motivated entrepreneurs
00:05:01.220 and get it going.
00:05:02.060 But those are the primary two differences.
00:05:03.760 Number three, pitching style.
00:05:05.320 What is it like to pitch
00:05:06.720 those two different types of investors?
00:05:08.660 Well, number one, the angel is very informal.
00:05:11.580 At the end of the day,
00:05:12.480 most of my investments came from an introduction
00:05:15.680 to a phone call, to an in-person meeting,
00:05:17.860 to writing or wiring a check.
00:05:19.280 I don't, I literally don't, I don't know why I did this
00:05:21.160 because I've never actually written a check.
00:05:24.420 Nope, I'm thinking even when I've been investing now
00:05:26.660 for 15 years as an angel investor
00:05:31.000 and I've never written a check, always wire transfer.
00:05:32.940 It's a lot of money, it makes no sense.
00:05:34.800 Anyways, you just wire the money and it's very informal.
00:05:38.840 Usually in today's world, you know, maybe some Zoom meetings 1.00
00:05:41.600 but there's some eye to eye, there's some contact,
00:05:43.560 you wanna see the person.
00:05:45.140 On the VC side, it is a bit more formal, it's structured.
00:05:49.840 And most VCs have this thing called Monday meetings
00:05:53.200 and their Monday investor meetings
00:05:54.720 is where all the partners of the investment firm
00:05:57.480 get together and some of the investments
00:05:59.640 that they're considering will come in
00:06:01.020 and actually pitch to the partners, right?
00:06:03.800 Now they'll socialize the idea,
00:06:05.400 they'll have shared it internally
00:06:07.760 with their other partners before you show up,
00:06:09.360 so it's not like it's the first time
00:06:10.560 they're hearing about you,
00:06:11.460 but it is a lot more formal structure.
00:06:13.520 They'll want kind of a pitch deck, et cetera.
00:06:16.440 And it's usually done in an office
00:06:19.700 or obviously in today's world,
00:06:21.300 maybe through, you know, remote meeting tools,
00:06:23.960 but those are the two big differences,
00:06:26.080 informal versus formal pitching styles.
00:06:28.360 Number four, check size.
00:06:29.760 How much does an angel usually invest versus a VC?
00:06:33.080 Well, here's the deal.
00:06:34.600 On average, an angel investor is anybody
00:06:37.560 on the very, very low end, 10K, so $10,000,
00:06:41.220 up to about $250,000, you know?
00:06:43.740 And some angels will give you 500 to a million,
00:06:47.520 but honestly, that's the exception, not the norm.
00:06:50.540 But on average, you can expect just an angel investor
00:06:53.240 to invest that range, 10K to 250K.
00:06:55.920 On the VC side, I would say it's at the 250 level
00:07:00.120 on the bottom end or up to 3 million,
00:07:02.960 especially if you're first time raising
00:07:04.240 and it's like a pre-series A, a seed round.
00:07:07.680 That's about the range of today.
00:07:09.260 And it's changed over the years.
00:07:10.440 Look, I've been doing this for over 10 years
00:07:12.520 on the venture funding.
00:07:14.000 I've done two venture-backed companies.
00:07:15.640 And what used to be a seed round is, you know,
00:07:19.500 dramatically bigger.
00:07:20.660 The rounds are getting bigger, et cetera.
00:07:22.400 But now we're seeing a lot more efficient companies
00:07:25.200 getting to a higher level of traction.
00:07:26.920 So sometimes their level of traction
00:07:29.040 versus the amount of money they need is a lot lower.
00:07:31.100 So, but on average, you can consider VCs
00:07:33.160 to be between $250 and $3 million check sizes.
00:07:36.420 Number five, investment filter.
00:07:38.640 What do these two different types of investors look for
00:07:41.780 in regards to making a decision?
00:07:43.940 Well, the angel investor,
00:07:46.000 I mean, the cool part is,
00:07:47.000 is that if you can get a high net worth individual
00:07:48.740 like myself excited about your idea
00:07:50.540 and understanding the team
00:07:51.780 and the market experience you have
00:07:53.060 and all these things,
00:07:53.700 the total addressable market
00:07:54.740 and kind of your unique angle,
00:07:57.040 I've seen people raise money
00:07:58.700 with just a story and a prototype.
00:08:00.440 Literally, here's the story.
00:08:02.360 This is where I think it could be.
00:08:03.820 This is the prototype that shows you the functioning,
00:08:06.140 you know, code working
00:08:07.200 and very little traction or revenue, right?
00:08:10.780 Now, ideally, the more you have,
00:08:12.340 the better it is for angel investors.
00:08:14.080 But the truth is, is a lot of angel investors,
00:08:16.120 they're high risk people.
00:08:17.680 They're okay rolling the dice on, you know,
00:08:20.480 a family member or a friend or an introduction
00:08:22.540 that doesn't have a whole lot today,
00:08:24.580 but there's the essence and the seed of possibility.
00:08:27.960 On the VC side, not the same, all right?
00:08:30.860 The VC side wants to see a thing called traction.
00:08:33.460 The only part is most of them can't tell you
00:08:35.040 what traction looks like.
00:08:35.920 Here's the deal.
00:08:37.120 They wanna see revenue,
00:08:38.600 typically revenue generating product and market,
00:08:41.260 a team formed to kind of build this thing
00:08:45.040 that you're building.
00:08:46.080 But the real thing when they say traction,
00:08:47.640 they mean momentum.
00:08:48.420 They mean what I call performance over time.
00:08:50.340 If performance is on this axis and time is on this axis,
00:08:53.160 every time they meet you might be two, three, four times
00:08:55.700 that you're making forward motion, you're creating momentum.
00:09:00.140 That's what traction means.
00:09:01.320 Just because you have traction today,
00:09:02.420 but then you had less traction
00:09:03.700 and then more traction previously,
00:09:06.040 it's a negative investing signal.
00:09:08.400 So that's what they mean
00:09:09.820 is they wanna see forward momentum.
00:09:12.180 They wanna see performance over time grow.
00:09:14.000 And that's the level these people will do it on story.
00:09:17.360 The VCs want prototype and traction.
00:09:20.000 So quick recap, the difference between angel investors
00:09:22.160 and VCs, venture capitalists,
00:09:24.320 source of money, personal versus LP,
00:09:27.240 investment thesis, fund versus specific,
00:09:29.520 pitching style, informal versus formal, check size,
00:09:33.040 maxes out on the angel at 250,
00:09:34.640 starts at 250K, up to 3 million for the VCs,
00:09:38.480 an investment filter, story and prototype on the angel,
00:09:41.960 and then traction and momentum on the VC.
00:09:44.440 As I mentioned, beginning of this episode,
00:09:45.920 I wanna share with you the fundraising like a pro training
00:09:49.440 that I put together for my coaching clients.
00:09:51.460 It is absolutely free,
00:09:53.020 and click the link below to get access to that.
00:09:55.420 Essentially, I go through the three primary phases
00:09:57.940 of fundraising.
00:09:58.860 The first one, which nobody even knows about
00:10:01.100 is called pre-marketing.
00:10:02.880 And how do you set the foundation
00:10:04.220 to actually get a bunch of investors saying yes
00:10:07.000 to close your round with speed
00:10:09.400 and make sure you complete the round
00:10:11.320 and you never wanna raise less than you set out to do.
00:10:13.960 So be sure to click the link below to download
00:10:15.800 or watch that training.
00:10:18.000 It is free.
00:10:19.000 If you like this video,
00:10:19.700 be sure to subscribe to my channel,
00:10:21.700 smash the like button
00:10:22.780 and be sure to share it with anybody
00:10:23.900 that you think is struggling
00:10:25.240 with trying to understand these two things.
00:10:27.000 and as per usual I want to challenge you to live a bigger life and a bigger business and I'll see
00:10:31.220 you next Monday. Have you ever seen the Saturday Night Live scale with the V, the deep V, the double
00:10:36.280 deep V, the vault? We're going to the vault for the V, the V-neck? It's awesome.