Angel Investors and Venture Capitalists

Angel investors and venture capitalists (VCs) are two sources of funding for businesses. Both angels and VCs invest in entrepreneurial firms in exchange for an equity share in the business. An angel is a high-net-worth individual who invests his or her own capital in a company, where a venture capitalist manages a fund of pooled money from other sources (such as pension funds and insurance companies). Angel investors tend to inject start-up capital into a company's seed round of investment, where VCs generally invest in later-stage companies. Typically, VCs invest $2,000,000 or more in a financing round and angels invest amounts in the $5,000 to $100,000 range. The Angel Capital Report by the Center for Venture Research found that venture capitalists invested $29.4 billion in 3,814 companies in 2007. By comparison, angels invested $26 billion in 57,120 companies.

ANGEL INVESTORS

Typically, angel investors are former entrepreneurs who have retired on profit they earned from starting up successful businesses. Angels tend to seek active involvement in the companies they fund. Angel investments are usually very high risk because many are lost when start-up companies fail—in 2007, 27 percent of angel investment exits were accounted for by bankruptcies. Thus, businesses funded by angels must have the potential to return ten or more times the original investment within five years through an exit strategy such as a sale or an initial public offering (IPO). In 2007, mergers and acquisitions accounted for 65 percent of angel exits and IPOs represented 4 percent.

Angel investment is the largest source of seed capital available in the United States. In 2007, 39 percent of investments made by angels were in the start-up stage.

According to the Center for Venture Research, market conditions and the capital gap between the upper range of angel investment and the lower end of VC financing have required angels to invest in later-stage businesses. In 2007, 35 percent of angel funding was given to businesses in the expansion stage.

ANGEL GROUPS

Angel Groups are formed when a number of private investors wish to pool their resources to invest collectively in companies. These groups meet to review proposals from businesses seeking funding and conduct “due diligence” to decide whether to invest in a firm. Angel groups are usually made up of 10 to 150 accredited investors. As of 2008, there are over 300 of these groups.

VENTURE CAPITALISTS

Venture capital is a form of private equity invested in companies in exchange for convertible debt of ownership equity with the intention of taking the business public. Venture capitalists are fund managers who invest capital pooled from third-party investors in high-risk companies with the potential for high returns. The third-party investors are made up of wealthy investors and financial institutions. VCs tend to fund enterprises that are too risky for bank loans or the standard capital markets. For this reason, many new companies with a limited operating history seek venture capital, because they cannot obtain funding through a debt issue. One disadvantage for entrepreneurs who are funded by venture capital is the VCs usually get a say in company decisions.

BIBLIOGRAPHY

“For Entrepreneurs.” Angel Capital Education Foundation March, 2007. Available from: http://www.angelcapitaleducation.org/dir_resources/for_entrepreneurs.aspx.

Sohl, Jeffrey. “2007 Angel Market Analysis.” Center for Venture Research. Available from: http://www.wsbe.unh.edu/files/2007%20Media%20Release%20-%20Lori%20Wright.pdf.

U.S. Small Business Administration. “Finance Start-up.” Small Business Planner April, 2008. Available from: http://www.sba.gov/smallbusinessplanner/start/financestartup/SBA_INVPROG.html.

“Venture Capital Performance Outpaced the Public Markets Across Most Time Horizons in Fourth Quarter 2007.” National Venture Capital Association and Thomson Reuters April, 2008. Available from: http://www.nvca.org/pdf/Q407PerformanceReleaseFINAL.pdf.