Angel Investing vs Institutional Seed Funding – What’s Best for You?
Every business needs cash, whether it’s an established corporation or an early startup that works out of a garage. But seed funding is particularly important for new businesses, and especially for startups just starting out. I often get the question, Which type of seed funding is right for me and where can I find it”. The short answer is that there are a variety of different places to try and attract seed funding. Let’s dive into the different types of seed funding you might consider then trying to capitalize your new business.
Seed funding gets its name from its place in the business funding tree – it’s the source from which all future business prosperity and economic flexibility come from. But actually getting seed funding for a new startup requires convincing one or more investors of the worthiness of an idea.
For many entrepreneurs, this can be tough. That’s why they’ll look to sources like angel investing or institutional seed funding to get the initial capital they need to prove their ideas before acquiring enough funding to take their business to market.
Which of these methods is better: angel investing or institutional seed funding? In truth, both investment sources have their merit, but angel investing is a particularly good pick for startups without a lot of proven market potential.
Let’s break down how you can determine whether angel investing or institutional seed funding is right for your startup now.
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Whenever an aspiring entrepreneur has a great idea for a startup or new business, they need a little bit of capital to start building what’s called a minimum viable product or MVP. But even the beginnings of a business will cost money, and entrepreneurs or new business owners often don’t have the cash on hand to start pursuing their dreams alone.
That’s why they pursue “seed” investment.
In a nutshell, seed investment is the earliest round of investment for a new startup company. Any seed funding is intended to help begin the first operations of the company or help to construct a prototype of its product or services, which can then be utilized to gain additional investment from other benefactors later down the road.
Seed investment rounds are important since many new business owners and aspiring entrepreneurs don’t have the credit or successful business history necessary to garner a loan from a bank or another financial institution.
In a nutshell, seed investment is the earliest round of investment for a new startup company.
As a result, many entrepreneurs or startups looked at alternative forms of funding for their seed capital.
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Seed capital, while substantial to the new business owner, is usually much less than later, more substantial rounds of investment for startups that already have a proven prototype or business model. Because of this, seed capital can come from a wide variety of sources.
Many entrepreneurs get their first cash infusion of seed capital from known associates, such as coworkers, college friends, and even family members.
However, this form of seed capital fundraising is necessarily limited by who you know. Many entrepreneurs are not able to get enough cash to create a minimum viable product for their business or to start their company from scratch from known associates alone.
There’s an exception, of course, if the entrepreneur in question has lots of wealthy family members or happens to know lots of successful businesspeople already.
Much more common sources for seed capital are angel investors. “Angel” investors are typically experienced investment professionals (i.e. people with substantial capital to invest in startups and other opportunities to make money, which they then use to fund other companies and repeat the cycle) or business owners who have a little extra capital they want to grow.
They’re called angel investors since they typically choose to invest in new startups or entrepreneurs who may otherwise have a hard time acquiring the seed funding they need to get their project up and running.
Angel investors can work alone or be in a so-called “angel investing syndicate”. Angel investment syndicates are essentially collections of angel investors that may pool their money together to provide even greater opportunities for promising startups.
Angel investors typically ask questions of startup owners and entrepreneurs to determine whether they want to fund a new company. However, angel investors don’t necessarily require as many qualifications or as extensive a financial history compared to institutions or financial organizations, like banks.
Lastly, entrepreneurs can look for seed funding from institutional investors, which often operate in early-stage VC (venture capital) firms.
Institutional investors are essentially investment firms or groups of investors that pool money together from clients. The institution in question then makes educated decisions about where to invest pooled money in order to make a profit for its clients.
Because institutional investment firms are primarily profit-driven above all else, they often ignore certain startups in favor of others based on hard financial criteria or other discriminating factors.
Many in the earliest stages of running their startup may conflate seed funding rounds and friends and family funding rounds. But in most cases, the two rounds of funding are significantly different.
This is mostly because most entrepreneurs’ friends and family don’t have the capital to compare to angel investors or early-stage VC firms. As a result, the funding raised by friends and family usually amounts to less than $100,000 in all but the rarest circumstances.
This isn’t always enough to start even a small business, which could need hundreds of thousands of dollars or more.
Furthermore, friends and family may choose to fund startups or business ideas that don’t have much apparent economic merit. Even the most generous angel investor will still want to see a good business plan or at least know that an entrepreneur has a solid idea with potential before writing a check.
Lastly, “real” seed funding rounds are a little more official than investment rounds opened exclusively to friends and family. There’s an element of professionalism involved in attracting third parties to your business idea that you don’t get when asking for money from friends and family.
With all this understood, any entrepreneur or would-be startup executive needs to ask themselves a question: should they pursue seed funding from angel investors or from institutional investment firms? This is a complex question, but angel investors are generally a better bet.
As mentioned, angel investors are typically interested individuals or syndicates who make a habit of living off providing funding to startups that they believe have great potential for success. As opposed to institutions or firms, angel investors:
- are more likely to approve funding for startups that may not have tons of financial data compared to institutions
- can contribute considerable sums of money, as many angel investors and angel investor syndicates are quite wealthy
- may exchange significant funding in exchange for company equity or shares, particularly as it develops
Angel investment is also an excellent source of funding for entrepreneurs to pursue since, on average, such investments provide companies with funding within two weeks or less. Angel investors will usually write checks that can be cashed immediately, so the only factor slowing down how quickly investors can provide a cash injection is how comfortable they are with your company and/or business plan.
If an entrepreneur approaches angel investors early in their fundraising efforts, they may be able to get seed funding relatively quickly compared to other methods.
Angel investment syndicates are essentially collections of angel investors that may pool their money together to provide even greater opportunities for promising startups.
How much can you expect from angel investors? There’s no real way to tell. Some angel investors may only have the confidence or cash to provide a given startup with a few hundred thousand dollars of seed funding. Others may provide multiple rounds of investment totaling several million dollars. It all depends on the investor in question and how well you can prove that your company is worth the investment.
Any institutional seed funding firm or group derives its cash from its contributing members. These are most often individuals looking to make a profit through smart investment over time. Many institutional investors are actually people looking to build up larger retirement nest eggs.
As a result, institutional seed funding is a little more difficult to obtain, particularly if your startup doesn’t have a lot of hard data and/or you don’t have a working prototype yet. You may need to invest heavily in marketing and business analysis writeups or presentations if you want to secure significant institutional seed funding for your company.
However, institutional seed funding can add up to quite a bit. Some startups can benefit from millions of dollars in total depending on the size of the institutional investment firm.
In comparison to angel investors, typical institutional investment firms may provide seed funding within a month or so. It takes longer to interview with these organizations and for the institutions in question to come to a vote or consensus about which startups to fund.
With both options explained, how can startup owners and entrepreneurs know which investment method to pursue, especially for an investment round as crucial as the seed round?
In general, business owners should try to find angel investors initially. Angel investors may be able to provide startups with cash more quickly than any institution. Furthermore, angel investment funding may be easier to acquire since angel investors don’t typically require as much “proof” of hard business viability compared to institutions.
More specifically, angel investors are usually a better choice for early-stage startups or for entrepreneurs who are testing a relatively untapped market or idea. The fact of the matter is this: institutional investment firms are a little more conservative and careful by their very nature.
Institutional investment firms must attempt to make profits on their clients’ pooled money. This means they are a little more risk-averse and are more likely to work with startups that are “down market”. Unless you can prove that the risks of funding your startup are significantly lower than they’ll project, you may have a difficult time getting the seed funding you need to create a prototype or really get your business up and running from an investment firm.
There are always exceptions, of course – startups in relatively proven industries may have an easier time getting funding from investment firms compared to more fringe companies.
In contrast, angel investors are a little more willing to take a chance on new entrepreneurs with the right confidence and drive to succeed. They’re often dreamers at heart with a passion for success more than businesspeople.
In fact, many angel investors were once entrepreneurs or small business owners themselves. They know the challenges that come with trying to bring your dreams to fruition, so they might be a little more sympathetic if you don’t have the numbers on hand to prove your business’s future potential.
Ask yourself the following questions:
- What is my business about?
- How can I prove that my business will make money?
- Do I have any hard numbers about my business’s plan or profit potential?
All of these answers should help you determine whether your investment proposal will seem attractive to institutional seed funding firms or angel investors, or both. If you can get more funding, try to do so – you’ll need as much cash as you can get as you develop your business and attract new investors in the future.
Overall, angel investing is typically the best choice for entrepreneurs and startup executives looking to gather the seed capital they need to realize their dreams and create minimum viable products. Furthermore, angel investment is a great source of initial funding before you open up additional rounds of investment from wealthier investment firms and move into discussions about company equity and shares.
The fact is that angels tend to be a bit more forgiving and less risk-averse than institutional investors in my opinion. Just something to think about when looking for the next seed round.
About the Author
Jonathan Hung is one of the most active angel investors in Southern California, his mission is to drive value creation within each portfolio company. In support of this mission, he serves as Co-Managing Partner at – Unicorn Venture Partners.
Jonathan and his team target investments in US companies that have global market potential with a focus on long-term growth expansion to East Asian markets.
Jonathan developed his investing prowess as a Managing Member for his family office fund, J Heart Ventures, which made investments in start-up companies such as Gyft, ChowNow, Miso Robotics, Clover Health, Bitmain, to name a few startups he funded.
Jonathan has various degrees from the University of Southern California, London School of Economics, Massachusetts Institute of Technology, and The Wharton School at the University of Pennsylvania.