Angel Investor is also known as business angel or informal investor. The term Angel originally comes from Broadway that was used to describe wealthy individuals who provided money for theatrical productions. Angel investors are opulent individuals who organize themselves to provide seed capital for start-up businesses and share their knowledge to an entrepreneur on how to run the business. They mentor another generation of entrepreneurs by making use of their wide experiences and networks. Most of these investors are retired entrepreneurs or executives who are interested in investing their money and wanted to stay abreast of the business development apart from monetary return. They are also good sources of useful contacts allowing entrepreneurs the opportunity to network with others in their industry.
According to a Harvard report by William R. Kerr, Josh Lerner, and Antoinette Schoar, start-up companies funded by angel investors are less likely to fail than those companies who rely on other forms of initial financing. Financial institutions like banks offer loans to entrepreneurs but they demand for payment of interest on the invested capital, while angel investors usually get considerable control over company’s decisions, apart from owning a significant portion of the company.
Venture Capitalist, on the other hand, contrive the merged money of others in a professionally-managed fund. They are corporate entities that pool money from a range of institutional and individual investors. They usually possess greater expertise in leading companies through successive funding stages leading to an Initial Public Offering or IPO. For new companies with limited operating history and are too small to raise capital in the public markets, small companies that have not yet reached the point where they are able to obtain a bank loan or complete a debt offering, Venture Capital is very much appealing.
Venture Capital firms are much less likely to invest in startup companies at the seed capital stage. This is because the range of venture capital transaction is large around US$ 500,000 to US$ 10 million, or above while the range of angel investor transaction is typically from US$ 25,000 to US$ 100,000 for an individual, and up to US$ 1 million, or more, when acting in a group. However, venture capital may provide second round financing after angel investors.
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