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In my previous blog article, I started a discussion of funding opportunities for startup businesses by explaining the new phenomenon of Crowdfunding. In this continuation, I examine two more means to raise capital: angel investors and venture capital (VC) firms.
An angel investor could be any number of people: a cousin, a best friend, or anyone who has a personal interest in seeing a business succeed. An angel investor relationship is often much less involved than that of a VC firm, with a broader spectrum of available agreement terms because the power dynamic is different. In essence, an angel investor is akin to an individual donor from a crowdsourcing effort, but on a larger scale with one very significant difference: Like VC firms, angel investors almost always seek an, albeit unsecured, but definitive, return on their investment. This can often come in the form of equity in the business they are supporting, but may even materialize as a loan or some kind of convertible debt.
The upside to partnering with an angel investor can be found in the event that the business fails; the angel investor, depending on the agreement, may simply “walk into the sunset,” hopefully quietly, and the business owner may be free of any absolute liability to that person. Another advantage is that angel investors do not often demand as much control over the businesses in which they invest as VC firms do.
Venture capitalists (VC) are important players in the field of new and emerging technologies. With a well-organized structure and ample capital, VC firms maintain an ear to the entrepreneurial tracks, in an effort to find the newest, most exciting companies that fill a real public need and are able to demonstrate a real potential for profitability, — essentially to get in on the ground floor.
The method VC firms employ involves curating a group of promising businesses and betting that one of them will be successful. At the heart of their decision making is a mathematical calculation from which they “bet” on a group of 20 or so companies in need of capital, hoping that one of those 20 will turn a profit. If they do pick a winning investment, they stand to reap an enormous ROI in exchange for a relatively small expenditure.
VC firms typically seek out larger companies and opportunities, not necessarily a startup that’s just one individual on a couch. They’re looking for more stable, ongoing concerns, with a strong team of vetted entrepreneurs. Many times, VC firms will invest in companies that are already well financed in order to take them to the next level – top-down investment as opposed to ground-up investment like crowdsourcing.
The caveat that comes with the cash infusions offered by VC firms is a loss of control over the company. If a business owner is not looking to compromise and share control, venture capitalism will not be a good fit. Most of the time, however, business owners are seeking out an available VC firm and are willing to compromise in exchange for the funding.
There are many people and firms with capital sitting in places that are not necessarily as productive as they would like it to be. Accessing those funds can be a soul-searching proposition for many who seek to retain control of their businesses, into which they invested not only financial capital, but much energy, blood, sweat, and tears. To ensure both the continued success of your business and a degree of control over your vision, contact me today to learn about your options.