Angel Versus Institutional Funding At The Seed Stage

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14 mins watch

29th May, 2019

In this episode of Matrix Moments, Avnish Bajaj, Founder & MD, Matrix India, outlines the key differences between fundraising from an angel investor versus a VC. From time commitment, cheque size, leveraging the investors network, and guidance on how to raise your next round, this episode touches upon the process to follow while navigating fundraising at the seed stage, as a first-time founder.

Salonie: Hi and welcome to Matrix Moments. This is Salonie and I am here with Avnish Bajaj, Founder & Managing Director, Matrix Partners India. Today’s topic is about raising capital from VCs versus angel investors.

So, Avnish, since we like many other VCs invest across stages and specifically at the seed stage, why is not a no brainer for founders to approach us versus an angel investor given that there is obviously added capital being provided as well as a clearer path for the future?

Avnish: Salonie, first of all, first time we are doing a video, so we can shake hands. So again, kudos to you for getting us to do keep experimenting with new formats. Hopefully, this is a format that comes out even more interesting than the earlier ones. So, look, first let me start off by saying I have been a founder before. Let me first give all the reasons not to raise money from VCs because in today’s day and age you can Google this question and you will be inundated with a number of different types of information. We should actually include some of these articles in our transcript. But, you will hear generally the following maybe six things.

One would be typically seed stage checks are smaller. VCs is like the other $300 million fund, so will a VC spend time. One question that would come out. Next question that would come is - and I am not giving in any order of priority. Next would VC has a very large fund, they put in a small amount in you. If things are not going well, they will write it off. Angel, it’s a significant investment for them, unlikely to do so. Will give it all they have. Second, call it commitment of sorts.

Third, what happens if the VC doesn’t put money in your Series A? It’s called the negative signaling effect. So, if a VC who is already in your cap table, is not putting in money in your next round, then you are probably screwed. So that is another thing you will hear. On the positive side for angels, given that they are doing fewer investments, they are typically a lot of them are now actually doing it full time, often they are domain experts. Somebody has done enterprise sales in a SaaS business. Somebody is a CTO. Somebody maybe a marketing guru, right? So, they bring this very specific domain expertise which a VC may not - I mean as a firm we always talk about value addition, but maybe a gap there.

The other interesting one I have heard, which I think is actually when I hear it from founders, I think it’s excellent, is that I will get too much money and I will lose financial discipline. I want to be in that zone where I am being stressed out or even the investors may want the founders to be in that kind of a zone.

Finally, angels are investing their own money. VCs are investing, well, partly their own money but largely LP’s money. So, they are responsible to other people. Does that change the dynamic? Does the VC start putting performance pressure too early in the lifecycle of a business? So, these are the reasons why it’s not a no brainer.

Salonie: Okay. So then, should I reverse the question and ask you then why approach a VC at all? Should founders wait until PMF to approach a VC and then until then just keep raising from angels?

Avnish: Yes. So, this question has come up due to a bunch of seed investments. I think this year we will probably do hopefully of the order of 15 if not more just seed. And all of these are super talented founders. Almost all of them have come with this pre-bias and asked this question, and rightly so. And first of all, I believe in co-existence with angels. So, in my view of the six points we spoke, the domain expertise and potentially even the coaching and time, although the coaching and time I have a point view from VCs perspective as well. I would say I have never encouraged or guided a founder towards not taking angel money. In my view, that’s not an option.

I think what we have to discuss is should you take VC money with angel money? And should you instead of trying to pick two, three, four key angels that you think can be very helpful for the reasons we spoke before, but should you add more angels that you may not even know who don’t meet these criteria or should be just take money from a VC? I think you should take money from a VC alongside those angels. And the reason - and by the way some of this is a Matrix view of the world. If we were making 30, 40, 50 seed investments a year, I would say that I would largely tell the founders don’t take make from those VCs because then all the things we just discussed in the first part would apply.

As far as Matrix is concerned, there is no difference between a seed investment and a Series A investment. For us, look, we are founders first. How does a founder change between seed and Series A? Why should I wait if I have seen a founder, why should I wait till Series A? I want to get into business with them.

Now at the same time, I/We as Matrix understand all the issues. So now the question is what our approach to those issues. So, let’s talk about one by one, but I will tell you the most important one in this would be, well, let’s start with time commitment. To me, if a founder has not pitched to the VCs full team, some people have investment committee, we don’t have that concept. We have a concept of a team meeting. That means that you likely don’t have buy in from everybody at the firm. I wouldn’t take that VC’s money.

As far as Matrix is concerned, it’s a time commitment saying that we would make at A. I just got out of a monthly update of a seed investment. So, for me there is no difference in the time I give a seed investment or as Matrix we give a seed investment versus a series A. That’s point number one. So, time commitment. Be clear that full team has bought it. Some GP is sponsoring it or some IP, investment professional, is sponsoring it where you get the full conviction on time, to me that’s a non-negotiable.

If you have that, then you should worry about the signally effect. So, the negative signally effect, the way I or we again as Matrix our approach is - remember I have been a founder so I kind of speak from that hat. So, my view is, look, as a founder - as a VC, yes, we have portfolio. As a founder, you have portfolio of one, right? So, yes, you should worry about this a bit more. And what I tell founders is, look, ultimately you are building a business to succeed. You are not building a business to raise money. You are not building a business to manage your VC. If - there are three states possible after you raise money. Either the business is doing really well. It is doing really well. Whether we invest or not, you don’t even care because there will 10 other people.

Or, the business is completely not working. Maybe by that time, you would probably give up, right? These two edge cases don’t really matter. Unfortunately, or fortunately, it doesn’t end up with these cases. Seventy to eighty percent will be in the middle; unclear. At that time, my question to the founder is not - or, the founder’s question should not be, hey, Matrix or hey, VC, will you put in more money? It should be, hey, me, do I want to put in my life - more of my life into this?

Our view is with the kind founders we back with most intellectually honest founders, there may be a journey to get to the answer. But, I think that answer will be if they founder is willing to put their life into it, we are willing to put more money into it. In the history of Matrix that’s always been the case. Either we have jointly - like I said that there may be a journey. But, either we have jointly reached a conclusion that this doesn’t make sense, or we have jointly reached the conclusion let’s put in more money.

There are things one can do to put a little bit more structure around this. Put in some metrics. Put in some milestones. Be intellectually honest of what range of those milestones are going to be within acceptable variances or not, but that would be the second piece.

Then, there is this whole thing about VCs can do and angel can’t. I don’t think that works. Even VCs don’t want to lose. Now, obviously, the amount that a VC has invested if it’s very small, theoretically you can argue that VC doesn’t care. I think that’s where it comes back to the first, has the firm bought in, if we have bought in as a firm, if we are interacting, if you are getting the time from investment professionals that nobody wants to see a loss. So, I don’t worry - I don’t think that’s as much of an issue as possible.

I mentioned earlier, domain. Definitely, it’s important therefore to work alongside with angels because of domain knowledge as well as they may spend more time. And that’s a good thing. So again, both sides can work together. Performance pressure, guiding VCs decisions I just think that’s not the case. It is the case maybe in later stages. It’s not the case in early stages. Most seed investments, we don’t go and discuss with our investment LPs, this is the investment we have put in a million dollar. So that is actually a red herring. That is actually not an industry issue.

Do VCs tend to put performance pressure or - I don’t - if it is pressure, you should actually have that discussion upfront. We don’t. But, do VCs expect more discipline, not financial in terms of tracking to PMF what are the milestones. I think that’s a good thing for the company. I think it’s like saying if you take money from your friends and family versus you take money from a professional, don’t you want to take money from that professional who has by the way seen the story probably tens if not hundreds of times before. And they will also be able to guide you and give you early indicators.

So, in my view, if I were to start a business again, I would take money both from VCs as well as angels in the same seed round.

Salonie: So, you are basically advocating like a cohort between angels and VCs. But, where does that leave the angel because VCs are known to sort of go after majority ownership? And then on the cap table, does that sort of the crowd the angel out? Or, does that make the founder further dilute his shares? Or…?

Avnish: That’s a great question. And I speak to a lot of angel investors who have that concern. This I can only answer from a Matrix perspective. For us, it is strategically important. We believe that angels play a very important role in the ecosystem. We will not crowd out angels. So, my commitment - our firm’s commitment to angels is, look, we want work alongside you. So typically happens and it’s a legitimate issue which also by the way sometimes the founders worry, will it dilute us too much because both of you will be wanting your ownership.

Let’s take examples. Let’s say a company’s is raising 2 crores from angels. Now just putting in a crore - two crores for a $300 million firm, does it make sense? Now, there is another piece of it which is if we put in more money, you actually as a founder get much more runway to hit different levels of metrics and different levels of progress in the business. So, what I would commit to an angel or the key angel is, listen, you keep your two. We want to add two. Maybe we want to add three. Now the founder may say we don’t want to add so much more money. Maybe we want to add a million dollars. We would add it at a different deal construct. But, let’s say, the founder obviously by definition will dilute more. but also, for more money. And at the end of that process, the founder - the company would be at a stage where hopefully it’s valued much higher.

So, when a founder looks at it, if you look from a reward perspective, which is dilution, how much did I dilute to get to this? You have to look at the blended dilution. If you raise only angel money, let’s say at 20 crores. You ran out of it, you raise the next round if it is successful, let’s say at 40 crores. We raise angel plus VC money, let’s say blended was 30 crores. And the next round is 100 crores. Now net-net how much did you dilute? But, also think about - that’s the reward perspective. But also think about the risk perspective. Because you also raised VC money, you got a lot more shorts at the goal. We can make a lot more mistakes along with it.

So, I think if you put this all together, one can from a founder’s perspective in my view, it becomes a no brainer. It’s actually a little bit trickier to make it work from the angel perspective like you mentioned. And in that, like I said, we have a view as a firm that we have to work alongside people. In my view also from a more macro perspective, everybody has a role in the ecosystem. And I think angels play an extremely important role. So, we want to be known as the most angel friendly VC out there.

And if that means that in the first round, we will compromise on ownership, so be it. We would like to accrete more in the next rounds which we can if the business is tracking in a certain direction. If it’s in that middle zone, milestones are mota moti getting met, we will put in more money and get our ownership. So that’s really the way I see it. It’s not an easy topic. For me it seems to all come together as a win-win-win for founder, VC, and angels. Unfortunately, that’s not how this topic has been perceived for a long period of time. And I am hoping this is the beginning of trying to change that perception.

Salonie: Sure. Thanks, Avnish.

Avnish: Thank you.

Salonie: Thank you for tuning in. And you can find the transcribed version of this podcast on You can also follow us on Twitter and LinkedIn for more updates.

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