How to Raise Business Fund using Venture Capital Vs Angel Investors

Business Fund using Venture Capital Vs Angel Investors

How to Raise Business Fund using Venture Capital Vs Angel Investors

Do you about venture capital and angel investors? Well this article will show you how to raise business fund using venture capital vs angel investors

Business owners can raise money or start up capital for their businesses through a variety of financing sources.

These sources are broken into two categories, debt financing and equity financing.

 

Deb Financing involves borrowing money to be repaid, plus interest; basically money that you borrow to run your business.

In broad sense, debt financing occurs when a firm raises money for its working capital or capital expenditures by selling bonds, bills or notes to individuals and/or institutional investors.

Successful long-term growth for most businesses is dependent upon the availability of equity capital.

And angel investors vs. venture capitalists are the two sources of equity capital.

 

What is Equity Financing

 
Equity financing is the process of raising capital through the sale of shares (ownership interest) in an enterprise to raise funds for business purposes.

Equity financing is where the money raised gives the investor an ownership interest in a company.

This ownership is commonly represented in the sale of shares (stock) to a limited number of investors or participation by venture capitalists.

A company can only sell its shares, or transfer its right of ownership to the public as a means to raise funds if its articles allow this power.

So, the two key sources of equity capital for new and emerging businesses are angel investors and venture capital firms.

 

How to Raise Business Fund using Venture Capital Vs Angel Investors

 

Venture Capital Vs Angel Investors

Venture capital for new and emerging business ventures typically comes from high net worth individuals (“angel investors”) and venture capital firms.

Venture capital investors adventure capitalists, typically provide unsecured capital to young, private companies with the potential for rapid growth.

Such investment covers most industries and is appropriate for businesses through the range of developmental stages.

However, this type of investing inherently carries a high degree of risk.

Venture capital is long term or “patient capital” that allows the benefiting companies the time to mature into profitable organizations.

Venture capital is also an active rather than passive form of financing.

These investors seek to add value, in addition to capital, to the companies in which they invest – in an effort to help them grow and achieve a greater return on the investment.

This requires active involvement; almost all venture capitalists will, at a minimum, want a seat on the board of directors.

Although investors are committed to a company for the long run, but that does not mean indefinitely.

The primary objective of equity investors is to achieve a superior rate of return through the eventual and timely disposal of investments.

A good investor will be considering potential exit strategies from the time the investment is first presented and investigated.

Entrepreneurs should therefore consider this carefully because they will then participate in the increased value of the business and have voting rights as well.

As the business founder or owner, your lawyer and accountant would be appropriate sources for more information on this subject.

 

 

How to Raise Business Fund using Venture Capital Vs Angel Investors
How to Raise Money for Business through Venture Capital Vs Angel InvestorsDebt, Cash vs. Equity Compered

 

 

Venture Capital vs. Traditional Financing

 
Venture capital is a type of equity financing that addresses the funding needs of entrepreneurial companies that for reasons of size, assets, and stage of development cannot seek capital from more traditional sources, such as public markets and the Banks.

Venture capital investments are generally made as cash in exchange for shares and an active role in the invested company.

 

Venture capital differs from traditional financing sources in that venture capital typically:

  • Focuses on young, high-growth companies
  • Invests equity capital, rather than debt
  • Takes higher risks in exchange for potential higher returns
  • Has a longer investment horizon than traditional financing
  • Actively monitors portfolio companies via board participation, strategic marketing, governance, and capital structures.

 

 

Related: How SMEDAN Facilitates Easier Access to Funding MSMEs in Nigeria

 

 

The Venture Capital Processes

A startup or high growth technology companies looking for venture capital typically can expect the following process:

 

Submit Business Plan.

The venture fund reviews an entrepreneur’s business plan, and talks to the business if it meets the fund’s investment criteria.

Most venture funds concentrate on an industry, geographic area, and/or stage of development (e.g., Start-up/Seed, Early Stage, Expansion Stage, and Later).

 

Due Diligence.

If the venture fund is interested in the prospective investment, it performs due diligence on your small business, including looking in great detail at the company’s management team, market, products and services, operating history, corporate governance documents, and financial statements.

This step can include developing a term sheet describing the terms and conditions under which the fund would make an investment.

 

Investment.

If at the completion of due diligence the venture fund remains interested, an investment is made in the company – in exchange for some of its equity and/or debt.

The terms of an investment are usually based on company performance, which help provide benefits to the small business while minimizing risks for the venture fund.

 

Execution with Venture Capital Support.

Once a venture fund has invested, it becomes actively involved in the company.

Venture funds normally do not make their entire investment in a company at once, but in “rounds.”

As the company meets previously-agreed milestones, further rounds of financing are made available, with adjustments in price as the company executes its plan.

 

Exit.

While venture funds have longer investment horizons than traditional financing sources, they clearly expect to “exit” the company.

On average, this may start from 4 to 6 years after an initial investment, which is generally how they make money.

Exits are normally performed via mergers, acquisitions, and IPOs (Initial Public Offerings).

In many cases, venture funds will help the company exit through their business networks and experience.

 

 

How to Raise Business Fund using Venture Capital Vs Angel Investors

 

 

What is Business Angels or Angel Investors?

 
Business “angels” are high net worth individual investors who seek high returns through private investments in start-up companies.

These private investors generally are a diverse and dispersed population who made their wealth through a variety of sources.

But the typical business angels are often former entrepreneurs or executives who cashed out and retired early from ventures that they started and grew into successful businesses.

Hence, these self-made investors share many common characteristics.

 

Characteristics of Angel Investors:

  • Angel funding seek companies with high growth potentials, strong management teams, and solid business plans to aid the angels in assessing the company’s value.
  • Many seed or startups may not have a fully developed management team, but have identified key positions.
  • They typically invest in businesses that involved in industries or technologies with which they are personally familiar.
  • They often co-invest with trusted friends and business associates.
  • In these situations, there is usually one influential lead investor (“archangel”) whose judgment is trusted by the rest of the group of angels.
  • Because of their business experience, many angels invest more than their money.
  • They also seek active involvement in the business, such as consulting and mentoring the entrepreneur.
  • They often take bigger risks or accept lower rewards when they are attracted to the non-financial characteristics of an entrepreneur’s proposal.

 

 

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