Cat is a first-time founder and her new tech startup has picked up significant traction.

She’d like to raise money but she’s unsure if she should raise from angel investors or venture capitalists.

Does it matter? Which path would be easier? How should she think about this problem?

We just wrapped up our Angel Squad Summit where Eric Bahn, co-founder of Hustle Fund, shared the main difference in what angel investors and VCs look for when they evaluate opportunities.

It ultimately boils down to the size of the market.

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How venture capitalists access the market

At Hustle Fund, we have a simple question that helps us with all our decision-making:

If we invest in Cat’s company at a $1 million post-money valuation, do we believe that she is a founder with the right team and market to support a 100x outcome?

Or in other terms, if we invest at a $1 million valuation, does her business have the potential to exit or IPO for a $100 million valuation?

This is important for us because the strategy for a venture fund is vastly different from an angel investor. The math of venture capital can be complicated. Our co-founder, Elizabeth Yin, created a video detailing how VCs make money for those who are curious.

But all you need to really know is that VCs invest in dozens of companies expecting the majority of them to fail. The few startups that can give investors a 100x return will pull up the value of the entire portfolio.

Most VCs spend their time finding these concentrated winners. 

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How angel investors access the market

Similar to VCs, angel investors also look to invest in companies that will give them a positive return. But the strategy is different.

Eric actively angel invests in companies outside of Hustle Fund. He has invested in non-software companies, local restaurants, and even small businesses in his neighborhood. 

Eric’s threshold as an angel investor is very different. The question he and his wife ask themselves:

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Do we think this is a company that isn’t going to lose our money? Will we get any multiple on this investment?

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As an angel investor, if Eric gets a 10x return on Cat’s company, that would be a success. 

But as a VC, a 10x won’t be enough of a return to pull up the entire portfolio.

Angel investors are happy with hitting bases. VCs are happy when they hit a grand slam.

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So what’s the takeaway?

If you’re looking to raise money from a venture fund, make sure the market can be measured in billions of dollars.

This shows VCs that there is room to grow and capture a slice of the overall pie.

If your market is smaller than that, consider raising from angel investors. And during those conversations, ask what success looks like to them to see if their vision fits with your goals.