Raising from angels and VCs

Raising from Angels and VCs usually have slightly different dynamics although you can raise money from both in the same round.

Raising from Angel Investors

What do most angel investors prioritise?

1. EIS/SEIS Tax Relief - It is worth getting Advance Assurance for this as a lot of investors invest for tax relief and won't invest in non EIS/SEIS eligible companies.
2. Personal interest - If a business isn't personally compelling, it is harder to raise from an angel perspective.
3. A 20-50x return - An angel is likely to see this as a good return, whereas VCs may say this makes your business 'unscalable' or sub-scale for their investment goals.
4. Less rigid time horizons - When VC funds raise money, they usually have to return money to their investors (LPs) by a certain date, which means at some point in time they will either pressure you to exit or try to exit their stake to other investors.
5. Terms are less important - Because a 20x return is more acceptable and time horizons are more flexible, you will rarely find angels insisting on the terms that some VCs do. If this happens, you should question why this is happening and the incentives at play.

Who is most likely to angel invest in my company?

I generally see two paths for angel investing, but in reality, they both converge to the same place:

1. Angel investors invest in people they know, or people who come highly recommended by others that they trust. Most founders think angel investors will invest money into a company based off a 30 minute pitch, without having met the founder before, without knowing the industry well and without doing due diligence. Realistically, this dynamic is very unlikely to work. Our first investors at Seneca were people who we had worked with before starting the company. Our second investors at Seneca were people who our first investors highly recommended us to. Our investors at Novabook were either people who 1) had worked with us before themselves 2) who knew people who highly recommended us or 3) had invested in us before. When you meet anyone who you think might be an angel investor, view the meeting as a long-term game, not a one-shot pitch meeting. You can build credibility and trust over a period of 3-6 months and get investment, but in my experience, people you don't know very rarely give you money without a high mutual recommendation.
2. Build credibility via other means. A VC investing in your company or a syndicate putting together an investment builds social proof and confidence that your idea is a good one and that people trust you. Each investor no longer has to get to know you and trust you. Instead they can trust a proxy. What are good potential proxies here? 1) An incredibly good CV and experience (investors feel backing someone in their second company de-risks things a lot) 2) having VC investment 3) having other angel investors who they know & trust 4) the investment being part of a syndicate whose filtering process they trust or 5) build personal credibility by staying in touch, showing progress on the metrics that you share as important and showing that you're a great founder.

Raising from VC Funds

What do most VC funds prioritise?

1. A 100x return - A VC is likely to only see your business as an appetising investment if they believe they can 'return the fund' which would usually mean that they can see it 100x'ing their investment into your company.
2. Timelines - After X years of a fund, it is likely that keeping money locked away will lead to penal fees. At this point a VC will try to exit their position in your company. This will be via them pushing you to exit, or by trying to exit their position via secondary transactions.
3. Board seats & observer rights - Due to the institutional nature of the investment, the desire to observe and be in control is higher. This is their #1 priority, whilst for angels this is likely their #15 priority.

What terms do VCs ask for and what is 'market'?

1. Liquidation preference - This is common and 'market', although it does prioritise the investors above the workers who create value in a business. The example cited for why this exists is often, that if you raised £2M at an £8M pre-money valuation, then sold the business for £2M, the prior shareholders would get £1.6M and the VC would get £400k. If you have a 1x liquidity preference, the VC would get their £2M back first, before any other investors get paid out. There are so many preferences and sharing some examples here, however most people would view a 1x non-participating preference as fair. If someone asks for 2x or 3x and a participating preference, your cap table is becoming a lot more complex for future investors and the probability that you personally generate a return as a founder is falling. A company can sell for £100M and the founders can make not very much money due to liquidation preferences.
2. Vetoes on sale - Almost all VCs insist on having the ability to veto a sale. Whilst this can be justified with the above example, in practice, you could receive an offer to sell your company for £100M and your VC could veto it. The more rounds of funding you raise, the more complex this becomes. You should ideally limit the number of sale vetoes available and ensure that those with vetoes were the first or early investors in your company.
3. Pre-emption rights - The right to invest in future rounds to maintain your ownership % is very common. However, I have seen agreements where someone has the right to buy more than their ownership % in future rounds. This is not common. I would push back against this as ultimately 1) if someone believes in the company they should invest more money now and 2) if someone is buying more than their ownership %, ultimately other investors need to be losing ownership to provide this. This could create a real mess later on.