Angel Investor Venture Capital

ANGEL INVESTOR
An angel investor (also known as a private investor, seed investor or angel

funder) is a high net worth individual who provides financial backing for small
startups or entrepreneurs, typically in exchange for ownership equity in the
company. Often, angel investors are found among an entrepreneur's family and
friends. The funds that angel investors provide may be a one-time investment
to help the business get off the ground or an ongoing injection to support and
carry the company through its difficult early stages.
Understanding Angel Investors
Angel investors are individuals who seek to invest at the early stages of startups.
These types of investments are risky and usually do not represent more than
10% of the angel investor's portfolio. Most angel investors have excess funds
available and are looking for a higher rate of return than those provided by
traditional investment opportunities.
Angel investors provide more favorable terms compared to other lenders, since
they usually invest in the entrepreneur starting the business rather than the
viability of the business. Angel investors are focused on helping startups take
their first steps, rather than the possible profit they may get from the business.
Essentially, angel investors are the opposite of venture capitalists.
Angel investors are also called informal investors, angel funders, private
investors, seed investors or business angels. These are individuals, normally
affluent, who inject capital for startups in exchange for ownership equity or
convertible debt. Some angel investors invest through crowdfunding platforms
online or build angel investor networks to pool capitaltogether.
Origins of Angel Investors

The term "angel" came from the Broadway theater, when wealthy individuals
gave money to propel theatrical productions. The term "angel investor" was
first used by the University of New Hampshire's.
Essentially these individuals both have the finances and desire to provide
funding for startups. This is welcomed by cash-hungry startups who find angel
investors to be far more appealing than other, more predatory, forms of
funding.
Capital Rationing : Capital budgeting involves Capital rationing. That is

available funds must be allocated to competing projects in the order of project
potentials. The required funds and available funds may not be same and hence
poses problem for Capital rationing. A slightly high return projects involving
higher outlay may have to be skipped to choose one with slightly lower return
but requiring less outlay. This type of trade – off has to be skillfully attempted.
Capital rationing involves the choice of combination of available projects

maximise the total NPV, given the capital budget constraints. The ranking of
investment projects can be done either on the basis of present value index or the
IRR. The procedure to select the package of investment projects will relate to
whether the project is divisible or indivisible, the objective being the
maximisation of total NPV by exhausting the capital budget as far as possible. The
following are the steps to be adopted for solving the problem under this
situation:
Calculate the profitability index of each projects. Rank the projects on the basis
of the profitability index calculated in the above step. Choose the optimal
combination of the projects.
Venture Capital
It is a private or institutional investment made into early-stage / start-up
companies (new ventures). As defined, ventures involve risk (having uncertain
outcome) in the expectation of a sizeable gain. Venture Capital is money
invested in businesses that are small; or exist only as an initiative, but have huge
potential to grow. The people who invest this money are called venture
capitalists (VCs). The venture capital investment is made when a venture
capitalist buys shares of such a company and becomes a financial partner in the
business.
Venture Capital investment is also referred to risk capital or patient risk capital,
as it includesthe risk of losing the money if the venture doesn‘t succeed and
takes medium to long term period for the investments to fructify.
Venture Capital typically comes from institutional investors and high net worth
individuals and is pooled together by dedicated investment firms. It is the
money provided by an outside investor to finance a new, growing, or troubled
business. The venture capitalist provides the funding knowing that there‘s a
significant risk associated with the company‘s future profits and cash flow.
Venture Capital is the most suitable option for funding a costly capital source
for companies and most for businesses having large up-front capital
requirements which have no other cheap alternatives. Software and other
intellectual property are generally the most common cases whose value is
unproven. That is why; Venture capital funding is most widespread in the fast-
growing technology and biotechnology fields.
Features of Venture Capital investments
• High Risk
• Lack of Liquidity
• Long term horizon
• Equity participation and capital gains
• Venture capital investments are made in innovative projects
• Suppliers of venture capital participate in the management of
the company Methods of Venture capital financing
• Equity
• participating debentures
• conditional loan
The venture capital funding process typically involves four phases in the
company‘s development:
• Idea generation
• Start-up
• Ramp up
• Exit
A) Expansion Financing:
Expansion financing may be categorized into second-stage financing, bridge
financing and third stage financing or mezzanine financing.
Second-stage financing is provided to companies for the purpose of beginning
their expansion. It is also known as mezzanine financing. It is provided for the
purpose of assisting a particular company to expand in a major way. Bridge
financing may be provided as a short term interest only finance option as well
as a form of monetary assistance to companies that employ the Initial Public
Offers as a major business strategy.
B) Acquisition or Buyout Financing:
Acquisition or buyout financing is categorized into acquisition finance and
management or leveraged buyout financing. Acquisition financing assists a
company to acquire certain parts or an entire company. Management or
leveraged buyout financing helps a particular management group to obtain a
particular product of another company.
Advantages of Venture Capital
• They bring wealth and expertise to the company
• Large sum of equity finance can be provided
• The business does not stand the obligation to repay the money
• In addition to capital, it provides valuable information, resources,
technical assistanceto make a business successful
Disadvantages of Venture Capital
• As the investors become part owners, the autonomy and control of the
founder is lost
• It is a lengthy and complex process
• It is an uncertain form of financing
• Benefit from such financing can be realized in
long run onlyExit route

Angel Investor Venture Capital

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ANGEL INVESTOR

An angel investor (also known as a private investor, seed investor or angel

Understanding Angel Investors

Origins of Angel Investors

Capital Rationing : Capital budgeting involves Capital rationing. That is

Capital rationing involves the choice of combination of available projects

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