Should you raise from angels or VCs?

One of the most common questions early-stage founders ask is whether to approach angels or VCs. The answer matters more than most founders realise — not because one is better than the other, but because they operate on completely different models with completely different requirements.

How VC fund economics work

Understanding why VCs say no to certain companies starts with understanding what they need from the ones they say yes to.

VCs raise money from their own investors — pension funds, family offices, institutions — and need to return that capital with significant gains. To do this, a VC fund typically needs at least one investment to return the entire fund. A £30M fund needs at least one company to return £30M to the fund alone.

The maths is unforgiving. If a VC invests £3M across a company’s seed and Series A and ends up with around 10% equity after dilution, a £100M exit returns roughly £10M to the fund — a third of what they need from a single deal. For that reason, many VCs need to believe in a £300M+ exit scenario to get excited, even at early stage.

This is not a criticism of VCs — it’s just the reality of VC maths. But it does mean many genuinely excellent businesses simply don’t fit the VC model, regardless of how well-built or well-run they are.

When angels are the better fit

Angels invest their own money and aren’t running a fund with return targets. They can be excited by a £10–20M exit that would be irrelevant to a VC. They can back niche, specialist, or regional businesses that a fund can’t touch. And they can move faster, with less process.

If your realistic exit scenario — based on comparable transactions in your sector — is in the £10–100M range, angels and specialist investors are almost certainly your best source of early capital. Don’t waste time pitching to VCs who likely need fund-returning multiples you can’t credibly deliver.

The test to apply

Before approaching any investor, ask two questions:

•       Can this business realistically reach $20M+ ARR in the timeframe a VC fund needs?

•       Can it credibly offer a seed-stage VC a potential fund-returning multiple on their investment?

If the answer to both is yes, VCs are worth approaching. If the answer to either is no, angels and specialist investors will almost certainly be a better use of your fundraising time and energy.

Both paths are valid

It’s worth saying clearly: a business that’s right for angel funding isn’t a lesser business than one that suits VCs. Some of the best outcomes I’ve had as an investor have been in companies that never needed — or wanted — institutional venture capital. Matching your funding source to your actual trajectory isn’t a compromise. It’s good judgment.

Originally posted on LinkedIn.