Angel vs. VC: How first-time founders should navigate seed fundraising

This article is from an episode of Matrix Moments by Matrix Partners India, a podcast featuring candid conversations on what it really takes to survive the startup world. This is heavily revised from the original show transcript. For the full interview, go here.

In this episode, Avnish Bajaj, founder and managing director of Matrix Partners India, outlines the key differences between taking money from an angel investor and fundraising from a venture capital firm.

From time commitment and check size to leveraging the investor’s network and receiving guidance on how to raise the next round, Bajaj discusses how first-time founders can navigate seed-stage fundraising.

Why is choosing between angel and VC money not a no-brainer?

Let me start off by saying that I have been a founder before, so let me share all the reasons not to raise money from VCs.

You can Google this question and you’ll be inundated with a number of different types of information. But you’ll generally come across six things.

First, typically, seed checks are smaller, and a VC firm has a very large fund – will it spend time investing in a seed-stage startup? Another concern is that if a VC puts in a small amount in the startup and things don’t go well, the investor may write it off. Angel investors are unlikely to do so because it’s a significant investment for them: they will give it all they have.

Second, call it commitment, of sorts.

Third, what happens if the VC doesn’t put money in series A? It’s called the “negative signaling effect.” If a VC who’s already in a startup’s cap table doesn’t invest in the next round, then the founder is probably screwed.

Fourth, angel investors are often domain experts: somebody has done enterprise sales in a software-as-a-service business or is a chief technology officer or maybe a marketing guru. They bring a very specific expertise, which a VC may not be able to do. I know VC firms always talk about value addition, but maybe there’s a gap here.

The fifth one is interesting. I hear some founders say that if they get too much money, they will lose financial discipline. They would rather be in that zone where they are stressed out. Even the investors may want the founders to be in that kind of zone.

Finally, angels are investing their own money. VCs are investing partly their own money but largely the limited partners’ money, so they are responsible to other people. So, does that change the dynamic? Does the VC start putting performance pressure too early in the life cycle of a business?

These are the reasons why the decision isn’t a no-brainer.