Betsy Flanagan: Entrepreneur starts a business. When should they raise angel funding versus VC funding?

David Hornik: I think the answer is. So here's the incredibly unhelpful answer. It depends on the circumstance and the changes with every single company under every single circumstance. So putting that aside, I believe that financing is about raising money to reach a set of milestones that increase the value of your company. And doing so in a risk-adjusted manner, right?

So at any given point you may have the opportunity to raise, let's say $1 million or $5 million. And the question you need to ask yourself as an entrepreneur is, "How far will I get with my company on $1 million? Will I at that point be able to raise more money at a valuation that is higher than the million that I just raised?" And so therefore I've made progress, I raised more money. It isn't a huge waste of my time to be raising additional money, etc. I raise $5 million now, I get a lot more progress, I get a lot further down the road, but I'm raising it at a much lower valuation because the amount of progress that I make over that $5 million should be pretty meaningful. When I raise money here, I'm going to raise another much higher price than when I raised it here having raised a single million dollars.

And so I think the entrepreneur has to sit down and say, "What do I want to do next to demonstrate that this is a viable business and will increase the value when I go out to raise money?" And whatever that number is, that's the amount to raise. I know entrepreneurs say, "Gee, I raise as much as I can get raise," because you'll never know when you'll be able to raise more. And I think that's a reasonable point.

On the other hand, I've found that entrepreneurs that are quite confident in their ability to deliver results on financings are reluctant to raise a bunch of money at a lower price when they think they can go away and raise it at a higher price. So I think that's the balancing act, it's risk versus reward, it's how far can you get.

And then that is only halfway to the answer to your question. Your question was, "Do you take angel money or venture capital one?" Venture capitalists tend to invest more money and want to invest more money. And therefore the difference between the $1 million and the $5 million often times is the difference between an angel investor and a venture capitalist. There are very few angel investors who can invest $5 million. There are very few entry investors, although increasingly large numbers, who are willing to invest $1 million. I actually have invested $500,000, I've invested $1 million. Because I think that if you find the right set of people and they're looking for money and that's an interesting business, then, you know, invest in one that makes sense. It's going to be a riskier investment, it's going to be at a lower valuation to affect that risk, whatever. I'm happy to invest super early but there are other venture investors who say, "Well, no, no, no. I want to see a team or traction, or, you know, a set of criteria, and I'll invest later more money at a higher price."