When an entrepreneur starts his dream project, there are many challenges he or she is bound to face. A great idea is just the beginning which requires a concrete plan and financing which is usually beyond what family and friends can provide.
There are different ways through which an entrepreneur can raise capital to kick-start his business such as private equity, banks, venture capital and angel investing. You can also find small business investors online by submitting your business plan on these websites. All of these investors have different vested interests and expectations from the business. Also, not all of them have a keen interest in investing in a new business start-up.
Private equity includes different types of investments made by private individuals or privately owned institutions for acquiring equity ownership in companies. Private equity firms raise funds from different sources such as retail and institutional investors to invest in companies.
Angel investors and venture capitalists come at different stages of the business with different expectations from their investments. Angel investors usually are former entrepreneurs or professionals that provide seed financing to start-up ventures. There are two different types of angel investors: affiliated and non-affiliated. An affiliated angel investor is related to your type of business in some way but is not acquainted with you. A non-affiliated angel investor has no connection with your line of business at all.
It’s better to have an affiliated angel on your side because he will not only provide you with the seed money but also give you useful insight on the challenges faced in that particular line of business. Angel investors are more willing to take risks than other types of investors. You can find small business investors such as angel investors online too. You only need to submit your business plan on angel investors’ websites and if they like your idea they will get in touch with you.
Venture capital is also a part of private equity but it is managed in a completely different manner. Venture capital is invested in the early stages of those start-ups that promise to have potential for high growth. Venture capital may come from private individuals but most of it comes from venture capital firms. These firms raise money for investment through different sources such as wealthy individuals, insurance companies, investment banks, endowments, pension funds, and financial institutions.
Unlike angel investors, venture capitalists seldom provide seed money to new businesses. They generally provide early stage capital or expansion capital to start-ups. Venture capitalists provide more funding to the new businesses but they also expect more return on investment and control over the business than angel investors. They require a seat on the board of directors and provide help in the operations of the business whereas angel investors generally do not require a seat on the board and are not directly involved in the functioning of the business.
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