Is it better to raise from a seed stage VC or angels who are investing their own money?

I'm going to start raising funds for my company soon. I already have more than a prototype website and can take payments, but still need to get a little more development complete.

I'm undecided on who to pitch first, companies that have seed stage funds which are typically VC backed, or angel investors who put up their own money? Angels are going to want and expect less of the company and a return in my opinion, while VC's may want more. Does anyone have experience with either that can give me some advice?

There is a nugget of truth behind this question. (And yes, I have experience raising money both from a VC and from individual 'lone wolf' angels, in the millions of dollars.)

To sum up: either has their pluses or minuses. You are statistically more likely to raise money from ('lone wolf') angels. Your valuation and deal terms will almost certainly be better (since you set them) but you can hurt yourself by driving your valuation too high at an early stage. Seed stage funds may or may not bring additional assets to make up for the almost certainly worse deal terms and valuation. I agree with the previous responder: typically capital seems scarce, so who cares who gives it to you, take it where you can get it. However, there are a small subset of companies that are doing so well that investors want to throw money at them, in which case you can get picky. Assuming you are in that category, read on.

The nugget behind your question is the eternal 'smart money' vs. 'dumb money' debate. The 'smart money' professional investors invest for a living, they set the terms on a deal, and they make sure they are looked after, including by getting a good valuation and (even more important) good terms on the deal (I've blogged on this). Overall, depending on the stats you look at, only around 1-5% of all private company investments (by number) are made by 'smart money' (if you want to source this check out the number of VC deals and angel group deals vs. the percentage of companies in the US that take financing from someone other than the owner). VC-backed funds and angel groups are 'smart money'.

The vast majority of investments are made by 'dumb money', i.e., 'lone wolf' angels. These are investors who don't invest for a living, who will typically say yes or no to deal terms you propose. If you propose a high valuation they are unlikely to negotiate it down, and are more likely to either say yes or walk away from the deal. If you do take this option, there are pluses (they are unlikely to try to take your company from you - they have a day job elsewhere) and minuses (they will give you advice only when asked - rather than giving you the hard truths you need to hear; they will have random networks rather than a network cultivated to support small businesses). Even if you choose to raise money from (lone wolf) angels, think hard about valuation. It's better to drop your valuation a bit now and give them a better deal (they are taking a big risk on you) then to drive a really high valuation to start with, and then have your valuation drop later on ... at which point they will all be pissed off: you want them happy so they will invest again.

Who cares? Who cares about the title, classification, or category? Angle or VC -- the money still pays the bills and grows your company. It will open some doors, close others, and bring a entire spool of strings.

What you do care about are financial terms, the sustainable relationships, personalities, available resources, unique opportunities, valuations and a whole host of other concerns--

What are the target investor markets? Step back and make a list of your target market for investors. Why would an investor want to invest in this project? What is in it for them? What need does it fulfill for them? Is it about money? Portfolio? Pride? Boasting?

Then within that list -- what are the groupings or categories. . . strategic investor? Personal supporter? Market segment advocate? Each of these groups will have some specific types of resources they bring and opportunity doors they open.

What you want and need: Now, think about who you are and what your team needs? Do you have a CFO? A CEO? Do you have someone who can raise money? That will cultivate investor confidence? Do you want someone who will be a intial investor, but not future rounds? do you want someone who will have the capacity?

Answer to these questions will allow to develop a profile of the actual person you want as an investor. Combined with your target investor market and you can zone in on the right people, ask the right questions to qualify and ensure that you don't get seduced by the wrong deal.

How will you approach: Finally, Review which of those resources you need. Which of those opportunities do you need? What is a phasing of groups that you will approach?
What is the pitch deck requirements for each target? What support material do you need for each? Who will you practice your presentation with? Which members of your team will present? which will answer questions? What follow-up material do you have?

Good luck as you search for capital -- treat it like a marketing campaign for your company -- create a target, make a plan and execute! Worry about how the people who invest classify themselves when you are teaching a class as the local university in your retirement.