Angel Capital and
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 and 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 haul, 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.
Differences Between Debt and Equity Capital
Debt Capital: Debt capital is represented by funds borrowed by
a business that must be repaid over a period of time, usually with
interest. Debt financing can be either short-term, with full repayment
due in less than one year, or long-term, with repayment due over a
period greater than one year. The lender does not gain an ownership
interest in the business and debt obligations are typically limited to
repaying the loan with interest. Loans are often secured by some or
all of the assets of the company.
Equity Capital: Equity capital is represented by funds that are
raised by a business, in exchange for a share of ownership in the
company. Equity financing allows a business to obtain funds without
incurring debt, or without having to repay a specific amount of money
at a particular time.
Angel Investors
Business angels are high net
worth individual investors who seek high returns through private
investments in start-up companies. 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. These
self-made investors share many common characteristics:
They 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 start ups may not have a fully
developed management team, but have identified key positions.)
They typically invest in ventures
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.
Venture Capital
Successful long-term growth for most
businesses is dependent upon the availability of equity
capital. Lenders generally require some equity cushion or security
(collateral) before they will lend to a small business. A lack of
equity limits the debt financing available to businesses.
Additionally, debt financing requires the ability to service the debt
through current interest payments. These funds are then not available
to grow the business.
Venture capital provides businesses a financial cushion.
However, equity providers have the last call against the company’s
assets. In view of this lower priority and the usual lack of a current
pay requirement, equity providers require a higher rate of
return/return on investment (ROI) than lenders receive. |
