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Business Angels vs Venture Capitalists

Despite the fact that, in general, the role and the basic functions of business angels and venture capitalists are very close, there are still a number of key differences that are important to know the budding entrepreneurs, in order to successfully build their innovative business.

Business Angel - a private investor, invest in innovative projects (start-ups) in the phase of the company in exchange for a return on investment and the share of capital (usually blocking, rather than control). Business angels are an important class of investors, which fills the gap between the initial investment company owners with further funding sources such as traditional venture capital, bank financing, listing on the stock exchange, etc. The name, business angels got because few people other than them decided to invest in risky projects that do not have sufficient security. Sometimes the decision to finance a business angel receives is based on positive experiences of entrepreneurs and self-confidence in the project. And the task of entrepreneurs who want to attract investment in the project, to create a kind of confidence in a business angel.

Most business angels acquire a minority stake (shares) of companies, as they are interested in, a businessman was sufficiently motivated to implement the project. To maintain control over their investments, they seldom buy less than a blocking stake. Business angels typically invest their own funds, unlike venture capitalists, who manage the money of third parties, united in venture capital funds. A small but growing number of business angels form a network, or a group, to jointly participate in the search area for investment and for the association of capitals.

Size of business angel investing can range from a few thousand to several million dollars, and usually no more than 5-20% of their available resources. Business angels make several investments, thus spreading their investments and reduce risk. Approximately one third of investments carried out by the involvement of two or more business angels. Thus, the program can be funded larger projects, and reduced the risk for investors.

After business angels invest in a company, its credibility increases and it becomes easier to attract additional funding from other sources. And business angels often use this, for example by providing its guarantee for bank loans.

In addition to finance, business angels bring to the company a valuable contribution - experience in the field of operations and management skills, which is usually not enough companies in the early stages, as well as their connections. Many entrepreneurs say that the knowledge and experience of business angels are the people is more important than finance. Some of them may be involved in the daily management of the company, or just be passive investors. In 80% of business angels are actively involved in the management of invested companies.

Studies in the UK and Finland, show that the volume of investments in small and medium enterprises business angels invest at least two times more than institutional venture capital funds, and the number of transactions made by them are 30-40 times higher than the number of projects funded by venture capital funds.

The economic value of informal venture capital market is not limited to only the general funding provisions. Its positive impact on the development of small business innovation and economic development impacts are:

  1. Business angels prefer to fund high-risk entrepreneurial firms with high growth potential, and at the very first stage of their development. By investing in companies that do not wish to finance institutional venture capitalists, they fill the so-called "equity gap". 
  2. Business angels prefer small amount of funding needed to start new businesses (just falls into the "equity gap").
  3. They invest in almost all industries. However, falling branch accessory company, it should be noted that the "angels" are most attractive growth potential.
  4. Business angels are more flexible in taking financial decisions than venture capitalists. They have their own investment criteria, the broader investment horizons ("patient money"), shorter design and lower the rate of return.
  5. Attract financing from business angels cheaper than from financial institutions.
  6. Most business angels investors are useful because they use their knowledge to develop your business. Free help and advice to an investor, who, as often happens, is a veteran of the business - are invaluable to start a business young entrepreneur. Usually from other sources, such advice is not to get.
  7. Financial market business angels geographically more scattered than the market for venture capital. Business angels can be found everywhere, not just in the major financial centers.
  8. Funding business angel has a positive impact on the company, since it increases its attractiveness in the eyes of other financiers. Investment "angels" really attract companies interested venture capitalists.
  9. Business angels are helpful and the fact that in addition to the direct funding can provide loan guarantees to the company.
  10. "Angels" are not afraid to invest in technology companies that genetically inherent risk.

Venture capital - Investors' capital to help the financing of new, growing or struggling for a place in the market of enterprises and companies (start-ups) and therefore carries a high or relatively high-risk, long-term investments in risky securities, or enterprise in anticipation of high profits. Venture capital is generally associated with innovative companies.

Venture capital - a capital used for private equity investment, which is usually provided by outside investors for financing of new, growing companies. Venture capital investments - it is usually risky investments that have income above the average. They are also a tool for the share owned by the company. Venture capitalist - a person who carries out such investments. Venture Fund - a mechanism to form a common investment fund (usually partnerships), to invest financial capital, primarily third-party investors in enterprises that are usual for the capital markets and bank loans are too risky.

General partners of venture firm (which is also called venture capitalists) are the leaders, in other words - they are professional investment business. Their career experiences may vary, but most of these partnerships is the general director of the company such as those financed by their partnership. Investors, venture capital funds called limited partners. This group of investors made up of very wealthy individuals and institutions with large amounts of capital, such as state and private pension funds, university financial funds, insurance companies and brokers of joint investment.

Most venture capital funds, there are 10 years old. This model was first successfully applied the funds in Silicon Valley in 1980. for a large investment in technology trends, but only during the period of domination, in order to reduce exposure to management and marketing risks of any private company or its products.

Venture capitalists can be universal or highly specialized investors according to their investment strategy. Universal investors called venture capitalists who invest in various industries, or in the company, in different geographic locations, or at different stages of the life cycle of the company. Not all venture capitalists invest in "start-ups". Unlike venture capital firms that invest only in companies at an early stage, venture capitalists, in addition to that invest in companies at different stages of the business life cycle. The venture capitalist may invest before you get a real product or before the company will be organized (so-called "seed investing"), or may provide capital to "run" the company in the first or second stage of development, which is also called "early investment." Venture capitalist can also provide the necessary funding to help the company develop a critical mass of financial and become more successful ("expansion stage financing"). Alternatively, the venture capitalist can help in mergers and acquisitions, providing liquidity and access to the founders of the company. Some venture capital funds, in contrast, specialize in the acquisition, recapitalization or reforming public company and closed, are attractive to investors.

Comparative table of the features of investment business angels and venture capitalists

Criterion Business angels VCs
stage of the life cycle, which invest Early stages: the creation of the company, the development of product (service) mainly during confirm a business idea (the completion of the product, in the market)
major contribution to the development of Finance, experience, control Finance, Control
investment size from several thousand to several million USD nespolkih from hundreds of thousands to tens of millions of USD
ownership interest Minority blocking stake (share) the controlling or blocking minus 1 share
invest funds Equity Borrowings raised its own funds or collected into a single pool (fund)
financial decision more flexible decision-Fin. making long-term investment, the lower the required return strict adherence to the primary investment criteria, less flexibility in making financial decisions, investments for 3-5 years
market size At least 2 times more venture capital market in terms of money and 30-40 times the number of transactions about 8.500 transactions per year for a total of about 80 billion USD per year

 

 

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