Unit 4

Venture Capital
Venture Capital Advantages & Disadvantages
Advantages of Venture Capital Disadvantages of Venture Capital
Large amounts of capital can be raised Founder ownership is reduced
Finding investors can be distracting for
Help managing risk is provided
founders
Funding is relatively scarce & difficult to
Monthly payments are not required
obtain
Personal assets don’t need to be pledged Overall cost of financing is expensive
Formal reporting structure & board of
Experienced leadership & advice are available
directors are required
Networking opportunities are provided Extensive due diligence is required
Collaboration opportunities with industry experts & Business is expected to scale & grow
other startups are available rapidly
Funds are released on a performance
Assistance with hiring & building a team is available
schedule
Losing the business for founders is
Increased publicity & exposure are likely
possible
Help raising subsequent rounds of funding is Leverage in negotiations is rare for
available startups
Advantages of Venture Capital
Raising venture capital has many advantages, and it may be the only option for fast-growing
startups wanting to scale quickly. Besides money, venture capital firms also provide input and
make introductions for potential partners, team members, and future rounds of funding. It can
also make hiring easier and reduce your overall risk.
1. Large Amounts of Capital Can Be Raised
Many small business loans for startups are limited to $5 million and qualifying can be difficult.
However, venture capital is available in amounts as small as $100,000 for a seed stage and more
than $25 million for more mature startups in large markets. There is also a tendency for startups
to raise venture capital several times, allowing companies to access a large amount of capital that
would otherwise be impossible.
2. Help Managing Risk Is Provided
Bringing on venture capital helps startup founders manage the risk inherent in most startups. By
having an experienced team oversee growth and operations, startups are more likely to avoid
major issues. The rate of failure for startups is still 20% in the first year, but having someone to
turn to for advice when a complex situation arises can improve the odds of making a good
decision.
3. Monthly Payments Are Not Required
When a venture capital firm invests in your business, it will do so for equity in the company.
This means that unlike small business and personal loans, there are no regular payments for your
business to make. This frees up capital for your business, allowing you to reinvest by improving
products, hiring a larger team, or further expanding operations instead of making interest
payments.
4. Personal Assets Don’t Need to Be Pledged
In most cases, you will not have to contribute additional personal assets to the growth of your
business. While many startup funding options will require founders to pledge their homes as
collateral or use their 401(k) for startup costs, most venture capital agreements will leave the
founders personal assets outside of the discussion.
5. Experienced Leadership & Advice Is Available
Many successful startup founders become partners at venture capital firms after they exit their
businesses. They often have experience scaling a company, solving day-to-day and larger
problems, and monitoring financial performance. Even if they don’t have a startup background,
they are often experienced at assisting startups and sit on the boards of as many as ten at a time.
This can make them valuable leadership resources for the companies in which they are invested.
6. Networking Opportunities Are Provided
When you’re focused on your business, there often isn’t time to network with people who can
help your business grow. Partners at a venture capital firm spend as much as 50% of their time
building their network to assist the companies they invest in. Having access to this network can
help you forge new partnerships, build out your clients, hire key employees, and raise future
rounds of funding.
7. Collaboration Opportunities with Industry Experts & Other Startups Are Available
When you get venture capital funding, you are getting what is often referred to as smart money.
This means the money you get comes with the added benefit of the expertise the venture capital
firm can offer. You will often work with partners from the firm, other startup founders who have
received funding, and experts from both of their networks to get your company on the right path
to growth and success.
8. Assistance with Hiring & Building a Team Is Available
The team you need to start a company and the team you need to scale are not the same, and
venture capital firms can help get key people in place at the company to help you grow. Also,
many potential employees may consider a venture-backed startup less risky than a traditional
startup with no funding, making it easier to recruit a talented and well-rounded team.
9. Increased Publicity & Exposure Are Likely
Most venture capital firms have a PR group and media contacts, and it’s in their best interest to
get exposure for your startup. Often being associated can add a great deal of credibility to a
startup, especially for founders who haven’t built other successful companies. The increased
publicity can lead to getting noticed by potential employees, customers, partners, and other
venture capital firms interested in raising funding.
10. Help Raising Subsequent Rounds of Funding Is Available
Venture capital firms are interested in seeing your company raise additional funding at a higher
valuation. They can introduce you to additional venture capital firms that can better assist you at
later stages and provide additional funding. Venture capital firms often reserve the right to invest
in future rounds of funding and often contribute additional capital as the startup grows.
 Disadvantages of Venture Capital
Losing complete control over your company is difficult, but this is part of raising venture capital.
It also isn’t easy to get funding. Besides maintaining growth, you will need to pass a due
diligence process and have someone from the venture capital firm sit on your board of directors
to oversee your actions.
Disadvantages venture capital:
1. Founder Ownership Is Reduced
When raising a funding round, you will need to dilute your equity to issue new shares to your
investors. Many companies outgrow their initial funding and have to raise additional rounds from
venture capital firms. This process results in founders losing the majority ownership in their
company and with it, the control and decision-making power that comes with being a majority
shareholder. Founders can mitigate this risk by only raising the amount that’s necessary.
2. Finding Investors Can Be Distracting for Founders
Startups decide it’s time to raise venture capital when other funding sources have been exhausted
and the money is necessary for growth. However, fundraising can take several months and
shouldn’t come at the cost of managing the company. By starting the process before funding is
critical, founders give themselves enough time to both continue to grow the company and raise
enough money to keep growing.
3. Funding Is Relatively Scarce & Difficult to Obtain
According to a report by the National Venture Capital Association, only about 5,000 venture
capital deals were made in the U.S. in 2018. Almost 3,000 of these companies had already
received venture capital in the past. Venture capitalists point out they receive about 1,000
proposals for every three or four companies they fund.
One option for startups seeking first-time funding is an incubator or an accelerator. They often
provide as much as $150,000 in funding and a three-month crash course that prepares companies
for growth and future rounds of funding. Startups should also consider angel investment for
smaller amounts of funding on more flexible terms.
4. Overall Cost of Financing Is Expensive
Giving up equity in your company may seem inexpensive compared to taking out a loan.
However, the cost of equity is only realized when the business is sold. Venture capital provides
much more than capital, like advice and introductions. However, the decision should not be
made lightly, especially if there are other funding alternatives.
For example, two startups both need $1 million and are valued at $10 million. The first company
takes out an SBA loan for startups for 10 years at 10% interest, and the other raises $1 million
for 10% equity. In ten years, if both companies sell for $100 million, the founders of the first
company paid $600,000 in interest for the loan and retained equity, while the second company
lost $10 million of proceeds from the sale due to the equity dilution.
5. Formal Reporting Structure & Board of Directors Are Required
When you get venture capital funding, you’ll be required to set up a board of directors and a
more rigid internal structure. Both facilitate growth and transparency for the company, enabling
it to scale. This can limit the flexibility of the company and reduce the amount of control that the
founders have. However, it is beneficial to a company that is growing rapidly.
Venture capital firms impose this structure to oversee the company and diagnose any problems.
At a faster pace of growth, problems also arrive more quickly and need to be fixed before they
get out of control. This structure also gives the venture capital firms comfort because of
increased levels of reporting and transparency.
6. Extensive Due Diligence Is Required
Venture capital partners need to screen startups because they are investing money that belongs to
outside contributors. This happens in two stages. In the initial stage, your technology and
business fundamentals are evaluated to determine if the market exists and if the business can be
scaled. In the second stage, they conduct a more thorough review of your teams’ background and
the startups financial and legal position.
Although this process can take several months, it is beneficial for the startups that go through it.
By identifying problems and addressing them early in the startups’ development, it is much
easier to correct them. Future rounds of funding become simpler too, because many issues have
already been reviewed and corrected.
7. Business Is Expected to Scale & Grow Rapidly
To get a return on their investment, venture capital firms need your startup to appreciate in value
on its way to being either acquired or listed on a public stock exchange. Knowing the business
needs to get there can often increase the already high pressure that founders experience.
However, there are ways founders can manage this stress.
By communicating with other founders and their investors, founders can ensure that they are
aligned on goals and can learn from the wisdom of others. Founders should also be cognizant of
reducing their workload by delegating when appropriate to allow them to focus their time and
energy on critical components of the business.
8. Funds Are Released on a Performance Schedule
Funds raised from venture capital firms are released gradually as the startup hits certain
milestones. These are specific to the business but include revenue goals, customer acquisition,
and other metrics determined by the venture capital firm. These goals and any conflicts should
raise a flag for discussion with the board. It can distract founders if the targets are the only things
being chased, but it also leads to greater business success.
9. Losing the Business for Founders Is Possible
Founders who are underperforming can lose their business. If founders are not engaging in
behavior that maximizes shareholder value, or are reckless and are using company funds for
personal use while neglecting the business, they are often let go. To minimize this risk, founders
should accept their board’s advice and communicate frequently about plans and goals.
10. Leverage in Negotiations Is Rare for Startups
Most startups seek venture capital only when it is the only source of funding that can meet their
needs. In rare circumstances, there are too many investors interested (which is known as being
oversubscribed), and the startup has leverage over the terms. However, most startups won’t have
much leverage besides rejecting the deal. This can be mitigated by starting your search early to
find a venture capital firm that understands your goals and funding needs.
 Angle financing
Introduction:
 Angel investors are most often individuals rather than companies. An angel investor
provides financial backing to entrepreneurs and early stage businesses, or start-ups.
 The capital that angels provide can be a single injection of funds or ongoing financial
backing via a series of investments.
 There are many pros and cons to angel investment. The biggest negative for many is
giving up equity or shares in the company – but the biggest positive is usually a
combination of the cash injection with advice and valuable business connections from
experienced investors.
Meaning:
An angel investor is a person who invests in a new or small business venture, providing capital
for start-up or expansion. Angel investors are typically individuals who have spare cash available
and are looking for a higher rate of return than would be given by more traditional investments.
An angel investor typically looks for a return of 25 percent or more.
Angel Investors are basically high net worth, affluent individuals who provide early-stage capital
for business during its initial start-up stage. These investors are often an entrepreneur’s family
and friends (but not always). These investors invest in companies which are at their very early
stage with no revenue visibility and high level of risk involved. Since the level of risk involved
in such type of investment is very high, usually they are investing initial capital in exchange for
convertible debt or ownership equity i.e. they get control in the equity ownership of the business.
In other words, Angel Investor is someone who put their own funds during the early stage of a
company and also contributes through their business experience. These are usually wealthy
individuals who either invest in the personal capacity or through crowd funding platforms online
or build angel investors network to pool in capital together and then invest in early-stage startups
in which they have a personal liking to a product or find the business idea compelling enough to
become a big success.
Features of Angel Investors Work
There are certain characteristics that angel investors look for when deciding whether to make a
particular investment.
 It's worth remembering that those characteristics aren't universal.
 Most angel investors only answer to themselves when making a decision, so they can
easily make a gut judgment or rely on a characteristic that seems unrelated to being an
entrepreneur.
 It's crucial to get to know anyone you're considering approaching about investing in your
business at this level.
 Learn what their individual considerations are when it comes to deciding on an
investment
Importance of Angel Investors
 Angel Investors network specialize in early-stage business.
 They are focused on helping startups take their first step in testing the viability of the
business idea.
 They usually invest in the entrepreneur starting the business rather than the viability of
the business as an investment is made even before business viability is tested.
  The capital provided by them can either take the form of a onetime investment or it can
be an ongoing capital support to help the company navigate through its difficult early
stages and reach a level where its product/ service has been tested and Venture capital can
come forward for investment.
 They take a high level of risk as the majority of startups seed by them fail during their
initial stages and results in loss of investment for the Investors.
 Hence These usually take a good share of equity ownership and have a clearly defined
exit strategy in the business they invest their fund.
 They fund promising startups in the hope that they will be paid out several times the
initial outlay once the company becomes successful.

Types of Angel Investors

Different types of angel investors
Corporate angels- These individuals are former business executives from large corporations
who have been downsized, have taken early retirement, or have been replaced. Even though
profitability of their investment is their overall goal, they also seek personal opportunity when
investing, claiming that they are looking for an investment opportunity when, in reality, they are
really looking for a job. For instance, many corporate angels are known to invest in one company
and seek a paid position, which is often part of the business deal. They are also known to have
about $1 million in cash and may invest as much as $200,000 in a company. Many can be
extremely controlling once they obtain their desired position in the invested company.
Entrepreneurial angels– These people are successful angel investors who own and operate their
own businesses. Their steady flow of income allows them to make more higher-risk investments
and provide a larger amount of capital for start-ups. Entrepreneurial angels tend to make
adequately-sized investments anywhere from $200,000 to $500,000 and are known for investing
more money into the same company as the business progresses. They enjoy the personal
fulfillment of assisting entrepreneurs launch a successful start-up and rarely take an active role in
managing a company.
Enthusiast angels– These angels are older (age 65 and up) businessmen who are independently
wealthy before their investments. They often invest small amounts of capital (between $10,000
to a few hundred thousand dollars) in several different enterprises and view investing as a mere
hobby. They also do not take an active role in management.
Micromanagement angels: These individuals are considered to be serious investors. Even
though many are born wealthy, the majority of these angels have acquired their success and
wealth through their own independent and strategic efforts. They often demand a board position
and are known to impose the same strategies they have used with their own companies towards
their invested companies. Micromanagers will usually invest anywhere between $100,000 and $1
million for each endeavor. Rarely do these angels seek an active management role, but tend to
emerge and be more actively involved when their invested companies do not do well.
Professional angels– These angels are professionally employed as physicians, lawyers,
accountants, etc. who invest in companies in their related field. Professional angels invest in
several companies at the same time, and their capital contributions range anywhere from $25,000
to $200,000 per investment. They may also provide services to their invested company (legal,
accounting or financial) at a discounted rate, but may be unpleasant to deal with and impatient at
times when it comes to their investments. Professional angels are of tremendous value for initial
needed capital and rarely make follow-on investments.
More kinds of angel investors
Head angels (aka “lead dogs”)-These people are true angel leaders who bring together and
advocate other angel investors to a specific deal. These head angels enjoy being the first in a deal
and leading others to an investment opportunity.
Mentor angels (aka “guardian angels”)-These individuals serve as advisors and mentors to
their invested companies. Providing insight to a young company and mentoring entrepreneurs to
achieve success is more valuable to them than monetary rewards.
Generational angels (aka “silver spoons with silver wings”)-These investors are the second
generation offspring of successful families. They are typically younger than the average angel
investor, but have acquired a significant amount of business expertise from working in the family
business.
Intentional angels (aka “dark angels”)-These angels will invest and appear very interested in
the company at hand. However, their intentional motive behind their investment is to rid the
founders and take over the company at hand.
Typical angels (aka “arch angels”)-These angel investors characterize themselves as the
distinctive type of angel investor everyone has read about, (i.e. high net worth investor, invests
because of social responsibility and community involvement, etc.).
Inexperienced angels (aka “cherubs”)-These “baby” angels have yet to establish experience
and credibility in angel investing. They often invest in what others commonly invest in rather
than independently. When they encounter adversity in the market, many will embrace the
challenges and continue angel investing throughout their lifetime, while others may simply feel
intimidated and give up investing.
Female angel organizations– In a male-dominated field, there has been the emergence of
women angel investor groups. Female angel networks primarily focus on the educational facet of
investing and advocate deal flow. Often times, female angel syndicates focus on a variety of
industries, not necessarily companies managed by or owned by women.
Venture capitalists who are also angel investors (“moonlight as angels”)-Some venture
capitalist firms may have strict rules, especially when it comes to independent investing. While
some VC organizations may enforce this policy, many do not. Sometimes an investment may be
so appealing a capitalist partner may decide to privately invest, especially if the financial
endeavor does not meet their firm’s parameters. VC partners may even decide to co-invest in an
attractive investment alongside their firm’s financing. VC can also independently fund early
stage investments, only to have their firm finance the company during later stages of
development. The final reason why VC’s may moonlight as an angel investor is because they
may find investment opportunities that are not appropriate for their VC organization, but can be a
tremendous opportunity if they decide to independently invest.
Will work-for-equity angels (aka “sweat-equity angels”)-These investors are service
providers who have the intent of exchanging their services for a percentage of shares in the
company. When a young company takes advantage of this type of service, they often save money
in the long run. A problem that may arise during this exchange is the entrepreneur may not
realize the importance of each portion of the equity, or the dilution (decrease in the percentage
ownership of a company in value and/or decrease in the economic value of an investment) that
may occur.
Non-company building angels (aka “technology angels”)-These types of investors are
primarily concerned with developing technologies rather than building a diversified portfolio of
companies. They are also known to assist entrepreneurs to license these inventions.
Angel investors can provide the necessary funding for a start-up. However, this process is
not easy, and when entrepreneurs are finally able to raise the desired capital for their venture,
they soon find out they are not compatible with their investors or the investors have unrealistic
expectations of them. To avoid this discrepancy, business owners are strongly encouraged to
learn about the different types of angel investors before they go about recruiting one. Being
aware of all the different angel types will help the entrepreneur sort through the undesirable ones
and choose the correct angel investor for them. Selecting a well-matched investor can make the
difference between establishing a strong foundation for a company or a failing venture. Join our
Angel Investor Network

Advantages and disadvantages of angel financing

Advantages of Angel Investor
Providing Funds to Talented Owners
The first and foremost advantage of an angel investor is that they are of great help to those
owners or entrepreneurs who are talented but are unable to start a business due to lack of funds.
Hence angel investors by giving funds at the initial stage give the talented owners a Launchpad
from where they can fulfill their dream and benefit themselves as well as angel investors.
No Collateral or Guarantee
Another advantage is that angel investor does not require any collateral or guarantee from the
owners of the company which is the case when funds are raised through banks or financial
institutions and hence for owners who have not solid financial background to provide collateral
to banks and financial institutions investment by angel investors is good way of obtaining initial
capital for their startup.
Knowledge Sharing
Angle investors not only give capital but also have a vast knowledge of business which can be of
great help to new entrepreneurs who are doing business for the first time. Hence owners can
make use of their knowledge to avoid mistakes which they committed which ultimately benefits
their business as lesser the mistakes higher the chances of making profits by the company.
Disadvantages of Angel Investor
Sharing of Profits and Stake
The biggest disadvantage of an angel investor is that they demand the share in both profits as
well as stake which initially does not create a burden for the owner but as the company grows
and profits rise this sharing of profits and stake can be burdensome for the business as well as the
owner of the business.
Constant Intervention by Angel Investors
Knowledge sharing is one thing but constantly intervening in important matters of the company
is another thing and that is the reason why sometimes owners feel frustrated as they find it
suffocating as they are not able to take the decision themselves independently due to constant
pressure from angle investors regarding important decisions of the company.
Reliability Issue
Another disadvantage of angel investors that only some of the angel investors come into the
company for taking the company forward and think about its long term growth whereas the
majority of angel investors put money into the company for generating quick gains and leave the
company. Hence not all angel investors can be relied upon as far as the owner of the company is
concerned.