Capital Raising – Who to Turn to Angels, Incubators or Venture Capital Funds?

December, 2014 / EKW

In most cases, entrepreneurs of technological ventures face significant difficulties in forming an investment transaction, for many and diverse reasons. One of the most significant issues in the capital raising process relates to the identity and character of the potential investors.

The investors can be divided into three main groups: private investors (angels), technological incubators and venture capital funds. Each of the three aforementioned types has formational limitations and circumstances which repeat themselves in most cases, and which direct the investors to investments with similar characteristics.

Examining the investment characteristics requested for the projects, while examining the nature of activity and the limitations imposed on each group of investors, makes the investment process more efficient, and directs the entrepreneurs towards approaching certain investors while knowingly dismissing approaching other investors who are highly likely to not participate in a given investment round.


The difficulty in raising funds for technological ventures in pre-seed stages is known and familiar. Apart from the trivial difficulties, most of which can be attributed to the high risks involved in the maturation process and in the success rates of ventures as stated.One of the most significant obstacles in the capital raising process is to determine which type of investors to approach[1].

At first, we will state that the insights which we will try to explain and describe hereinafter are not unequivocal, and there are probably varied considerations and changing circumstances which affect the decision of which investors to approach.

However, there are factual circumstances which in fact determine the type of relevant investors. Thus, for example: certain areas of activity are unsuitable for small private investors. In addition, technological incubators offer a given investment total which is non-negotiable, a fact which makes it difficult to raise capital at a different scope (smaller or larger).

The Types of Investors

Projects starting out which are in the process of raising capital for the project at the pre-seed stage, can approach three main types of investors: (1) private investors (angels), (2) technological incubators and (3) venture capital funds[2].

The investors belonging to each of the aforementioned groups have characteristics which differentiate them from other investors. The reasons for each of these characteristics are diverse:

Regulation – there are regulatory limitations imposed on technological incubators, which determine the exact given investment for each venture, the manner in which it will be transferred to the company (usually in equal monthly installments for the entire duration of the incubator – 24 months), setting a ceiling regarding the holding rate of the entrepreneur and the incubator; the projects must demonstrate technological innovation which is examined by the Office of the Chief Scientist and such. On the other hand, both angels and funds can invest amounts of money which vary between different ventures; the date of transferring the investment to the venture is determined in the negotiations and the investment can be paid in its entirety upon signing the agreement; also, the parties can agree on the number of installments, and whether it will be paid as a function of milestones or not. Even the requirement to demonstrate technological innovation is not necessary in the case of angels and funds, and these investors examine their investments from the aspect of investment returns, and not necessarily as an innovative technological development.

Contractual limitations – venture capital funds are tied in a bundle of contracts which include varied undertakings of the fund managers towards the investors in the fund. The directors in the investment funds (who are usually incorporated as general partners in limited liability partnerships), will select ventures which meet the investment criteria that was  initially approved by the investors, for example: investing in ventures in a specific area (such as clean-tech, mobile etc.), which are in defined stages of the project life (pre-seed, more advanced stages of marketing and sales and such). On the other hand, an angel invests his private money in relatively various projects, and makes many investments while relying on intuition and gut feelings. Naturally, angels will usually stick to investments in areas of their expertise, but the decision making process is more flexible and less cumbersome than in venture capital funds.

Increased prerogatives – another significant distinction is the categorical requirement of venture capital funds to receive increased prerogatives in companies in which they invest, as opposed to other investors who also request additional rights to those granted to entrepreneurs, but whose scope and character is lesser. The prerogatives and additional rights requested by funds are varied: there are managerial rights by nature (such as: veto rights in the board of directors, appointing senior management and such), alongside rights which are economic by nature (such as: liquidation preference, anti-dilution rights and such). The main reason for the funds’ categorical request for the above rights lies in the fact that they manage funds of their investors (limited partners) and try to reduce risks in every possible way. The funds’ motivation for reduction of risks is manifested in forming complex transactions, as part of which the funds request to receive almost absolute control in the invested companies by receiving significant veto rights, as well as implementing drastic economic mechanisms in order to guarantee their investment return. On the other hand, in most cases investment transactions made by private investors and even by incubators are more abstract, the investor’s prerogatives are relatively minor, and in most cases the investor even receives ordinary shares (a fact which greatly helps in future investment rounds) as opposed to preferred shares which are allocated to venture capital funds.

Practical Analysis

An outcome of the aforementioned is that a startup must approach investors in an educated manner and having thoroughly examined the characteristics of the planned capital raising process. Thus, companies which are not technologically innovative or companies that plan to raise a significantly higher or lower amount than the amounts offered by the technological incubators do not need to approach the incubators at all.

Prior to approaching the funds, an examination should be made as to the fund’s specific areas of occupation, emphasizing the development stages of the companies in which each fund invests. Private investors will tend to have much greater flexibility in investing in relatively diverse areas of projects, whereas venture capital funds invest in defined areas and in companies which are in similar development stages.

Moreover, entrepreneurs wishing to retain maximal flexibility in managing the venture, or who alternatively are interested in raising a relatively small capital, while issuing regular stocks, direct themselves in advance towards negotiations with angels, thus they can spare approaching venture capital funds. On the other hand, inexperienced entrepreneurs, who require managerial assistance and training and who feel and understand that the veto rights are a legitimate tool of the investor in order to conserve his control of the company, will direct themselves towards approaching venture capital funds, while relying on the professional experience and connections they offer in the industry.


Capital raising is a complex and tiresome process. As in every business process, prior to beginning the process it is important to try and define the desired outcome, on a number of levels (the scope of the capital raising, the investor’s contribution and managerial involvement, the type of security which the company wish to issue etc.) and only afterwards, to decide which type of investors to approach, as well as the nature and character of the investment proposal.

[1] We will not discuss additional significant questions in this article, such as: what type of security is offered by the company, what is the scope of the requested capital raising and such.

[2] In addition, in recent years a relatively high number of accelerators have been established in Israel, which assist young projects in opening doors and supporting development, and sometimes even invest small amounts of money in exchange for a small percentage of the project.