Two major types of investors for entrepreneurs are
venture capitalists and angel investors. Angel Investors are individuals who
provide capital to a startup company for a stake in return. Venture capital is
money provided by venture capital firms, professional investors, to small
startup companies with growth potential. They raise money from institutional
investors like pension funds.
The major difference during the past decade between
angel investors and venture capitalists is that angel investors acted alone,
while venture capitalists were operating within a firm structure, worked in
teams, and reported to senior partners.
Today, the differences have narrowed down between
them. During the previous decade, the deals were limited although the funding
cycle was more involved. Today’s deals are more high volume. Today’s angel
investors operate in groups, called angel groups, or networks, to pool
resources and investments. Angel investors seek high risk, high return
investment opportunities. Venture capitalists have shifted their funding to
late stage companies.
Sources of capital: there are two primary sources of
capital: Debt, which is borrowed money and is paid back with interest, and
equity, which is money invested in the entrepreneur’s company in exchange for
part ownership. Here it is important to mention that early stage companies
rarely raise money with debt financing. The exception is convertible notes,
which although are a hybrid form of debt, they are more closely related to
equity.
Another form of capital is bootstrapping. It is a form
of raising capital with very little capital, or from operating revenue of the
new company. According to the FED, 70%
of all startups are bootstrapped, with $500 or even less. It is beneficial
because the entrepreneur has full control of the company. On the downside,
bootstrapping drains personal finances, and prolongs the process to take
company to the market. However, when the company seeks external funding, it
will have a higher valuation.
An example of a
startup by bootstrapping is DOMO. On February the, the company sought a $125
million series C financing round. The company was valued at $825 million.
