Different Investors Require Different Approaches to Pitching

Hey DC— how do I get on your calendar to pitch my startup to you?

Sorry, dude, that’s not how I invest.

Hey Palter— does my startup fit with your investment thesis?

Uh, meaningless question.

Hey D. — are you looking for more deal flow?

Uh, no.

All day, I get reachouts likes these on LinkedIn and email. Founders fundamentally misunderstand the difference between VCs and angel investors, and assume angels are miniature VCs. We’re not.

Failure to understand these critical difference causes founders to waste time with ineffective outreach that gets met with indifference, silence, or worse — the dreaded How to Pitch Your Startup to Me reply from me.

Before you start fundraising, be sure to understand the difference between how angel investors and venture capital firms operate and look at deals.

What Isn’t Different

Founders seem to think the biggest difference is that angels will invest in startups that are too small for VCs or have too low of a return.

Unfortunately, the power-law economics of startup investing works the same for angels and VCs. 90% of our investments will fail (probably even higher for angels) so the ones that do succeed need to return 10x just to get to break even. They need to return 40x within 10 years to beat investing in the S&P 500 or real estate. So like VCs, angels look for startups that can generate big wins. Dividends or acquisitions by private equity don’t get us there.

If a startup is not suitable for venture investment, don’t expect angel investors to provide a different answer.

The Big Difference

What’s the fundamental difference between angels and VCs?

  • Angels are investing our own money.
  • VCs are businesses, being paid to invest for others.

This fundamental difference leads to a wide range of critical implications.

Source of Investment Funds

VCs are investing other people’s money (called LPs), mostly employee pension funds, university endowments, and family offices for which they take a 2% per year management fee plus 20% of the profits.

As custodians of other people’s money, VCs have to justify their investments to their LPs. It’s better for them to overpay for a headline deal in a hot sector than support a crazy idea that might change the world. So they chase after the same hot deals. At the same time, they get paid for investing, so they have no incentive not to invest every dollar they can.

In contrast, my angel investments come straight out of my checking account. It’s money I could use to buy a new car, remodel the house, or take my wife on a Mediterranean cruise. I have to be pretty convinced to write a check.

Angels have the luxury of investing in what we think will succeed rather than what looks good on a quarterly update to investors. We answer to nobody other than our spouses. However, we have no obligation to invest in startups instead of public Nvidia stock or rental property, or taking that cruise.

The implication: Both VCs and angels are surprisingly conservative in what they invest in, but in different ways. For VCs, the company needs to look hot. FOMO is everything. For angels, you have to convince us you’re a good investment that will pay for my retirement or least not make my wife kill me.

Full Time Employees vs Personal Investment

The analysts, associates, principals, and partners that populate VC firms are full-time employees. They’re paid a salary from that 2% management fee. Their job is to find and grab the best deals they can. They’re competing against other VCs for the top returns which will help them raise their next fund.

For most angels, startup investing is a passion project. Many of us work full-time jobs. Some are doctors, some are lawyers, some are corporate executives looking at startups in our spare time. We don’t have all day to review pitch decks and meet with founders.

The implication: VCs want deal flow — the more the better. They have interns and associates to triage the firehose of applications. Angels don’t have time to look at anything other than a small number of highly relevant deals. So when you pop up on LinkedIn and tell me you’ve got the greatest AI solution for sushi dining and can we set up a 30 minute intro call, the answer is the dreaded How to Pitch Your Startup to Me reply from me.

Investing Professionals vs Industry Professionals

VCs are professional investors. That’s what they do all day. They have a team of MBAs to analyze the investment. Angels rely on our professional expertise and industry connections.

Angel investors are not full-time investors, but many of us are full-time industry experts. We may know a whole lot more about your industry than the VC spreadsheet jockeys. Sometimes even more than you. Take advantage of that.

Who are the first investors in most lawtech startups? Lawyers. Early investors in medical products? Doctors and pharma executives. Investors in battery technologies? Electrochemists and battery specialists.

Rather than pitching random people from lists of investors scraped from PitchBook, look for experts in your industry who understand what you’re doing and why. Not only are they far more likely to invest, but they can become customers and advocates while providing validation to other investors.

The implications: Look for people in your industry to be your investors, not a generic “angel investor.” We invest in what we know. You can pitch me on your cure for cancer, but no matter how great it sounds, I’m not a medical specialist and don’t have any way to evaluate your claims. Those pitches for new protein bars, influencer monetization platforms, chatbots for car dealers go straight into the trash. Startups working on energy storage and computer networking get a closer look. Please check my LinkedIn profile before sending me your pitch and tell me why this is relevant to me.

Also look for angel groups. They offer the opportunity to present to dozens of angel investors at a time. Most won’t be relevant, but there’s sure to be a few in the group who understand what you’re doing. The groups share expertise and jointly evaluate the company, something impossible for individuals. But don’t forget they’re clubs of individuals rather than a business like a VC, and everyone is a volunteer, so the process can be slow and clunky.

Smaller Checks & Earlier Stages

A small venture fund has $100 million dollars. With investments in 25 startups, the average check size is $4M. So they invest in raises of $10M or more when the company is already valued north of $50M, meaning the startup needs significant validation and market traction before VCs will consider investing.

An angel investor like me typically writes a check for $25K. Our angel group might put in $250K in total. That limits us to investing in pre-seed and seed rounds.

The implication: Angels can only invest in earlier rounds with raises up to about $2M. With a minimum check size of around $2M, VCs only invest in raises of at least $5M. If you’re raising under $2M, don’t waste your time pitching VCs — you need to sign up angels. If you’re raising $5M or more, don’t bother sending me your pitch deck — go straight to the venture firms. But trying to raise $10M from VCs without the traction to justify a $50M valuation is a dead end.

Lots of Exceptions

What I wrote is broad generalities. There are plenty of exceptions.

There are super-angels investing $100M of their own cash, but hiring a staff to do the grunt work. They may be angels, but they act more like a VC with a single LP.

Conversely, there are micro-VCs with tiny funds that have no staff and are essentially angel investors. I make my investments via an entity called SüprDüpr Ventures. Don’t be fooled by the name — it’s just a legal structure for my angel investments. Be sure to understand who you’re talking to and how they operate. The name alone may not tell the story.

In general, focus on angels in the pre-seed and seed rounds and VCs after that. But understand that the two groups look at deals differently and adjust your outreach to match.

Both VCs and angels are looking for that needle in the haystack — the one startup that will generate a 100x return to make up for all our failures. If the plan isn’t to grow to revenues to $100M within a few years and get acquired for a billion, then neither group is the right way to fund your startup.