Angel and venture capital

Answer 1

VENTURE CAPITAL

In simple words, Venture Capital is defined as private equity capital provided by outside investors for financing of new, growing or struggling businesses.

Venture capital investments generally are high risk investments but offer the potential for above average returns and/or a percentage of ownership of the company. A venture capitalist (VC) is a person who makes such investments. A venture capital fund is a pooled investment vehicle (often a partnership) that primarily invests the financial capital of third-party investors in enterprises that are too risky for the standard capital markets or bank loans.

Venture capital is capital typically provided by outside investors for financing of new, growing or struggling businesses. Venture capital investments are high risk investments but offer the potential for above average returns and/or a percentage of ownership of the company. A venture capitalist (VC) is a person who makes such investments. A venture capital fund is a pooled investment vehicle (often a partnership) that primarily invests the financial capital of third-party investors in enterprises that are too risky for the standard capital markets or bank loans.

As a venture capitalist, you will face the following risks:

Risk of capital losses

Risk of lower rate of return, ……………

- You should be aware of the following POTENTIAL RETURNS from venture investment:

The objective of Venture Capital (VC) is to generate high rates of return over long periods of time. VC offers institutional investors and high-net-worth individuals high returns (historically better than stocks) and strong diversification benefits from very low correlations with other asset classes. The major negatives of investing in VC are long time frames, lack of liquidity, and high management fees.

VC firms typically manage multiple funds formed over intervals of several years. Funds are illiquid but as companies in the portfolio go public or are sold, the investors realize their returns. Funds typically consist of limited partnerships invested in a number of companies. A general rule for the breakdown of returns among VC company investments is 40% will be complete losses, 30% will be "living dead," with the remaining 30% generating substantial returns on the original investment. The big winners yield 10 or more times the original investment.

Venture funding and returns have been unprecedented in recent years and some experts believe venture capital is currently enjoying a phenomenal boom that will lead to a slowdown. Many are projecting single digit returns for the near future, but others believe high returns will continue. According to Venture Economics, the average annual return on VC funds was 48%, 40%, and 36% for 1995, 1996 and 1997 respectively. Many VC firms have reported even higher returns in the last few years and the internet has produced scores of success stories that have yielded remarkable short term returns for VC firms.

ANGEL INVESTING

Angel Investing, in the context of this course, is defined as investing personal money into a business with growth potential.

Angel investors are individuals who invest in businesses looking for a higher return than they would see from more traditional investments. Many are successful entrepreneurs who want to help other entrepreneurs get their business off the ground. Usually they are the bridge from the self-funded stage of the business to the point that the business needs the level of funding that a venture capitalist would offer. Funding estimates vary, but usually range from $150,000 to $1.5 million.

As an angel investor, you will face the following risks:

Risk of capital losses

Risk of lower rate of return

As an Angel investor, you will gets:

No tax breaks when he makes the investment and

No dividends while he holds the investment.

POTENTIAL RETURNS from angel investing can be vary. As can be expected there is a wide range of expectations related to potential returns, the least being 20%, and the highest 100%. The average rate of return on angel investing has been 34%. Several angel investors say that they write off the investment mentally as soon as it was made, given the high risk of this type of investing.

THE MAIN DIFFERENCES between venture capital and angel investing are as follows:

Under Angel investing, individual investor can invest personal money into a business with growth potential (e.g., you can have 10% of equity stake of a company and receive dividends on those shares). As an Angel investor, you should be looking to get involved in an interesting project where he will have a chance to make a large return on investment.

On the other hand, venture capital usually comes from groups who want to make large investments, especially in areas such as high-tech (e.g., mutual fund companies, pension funds, etc.). In addition, Venture capitalists (VCs) sit on boards of companies they fund.

Based on the economic downturn, it would be wise to invest some funds in the real estate market. The house prices are low at this time. It would also be wise to borrow some funds to buy rental property because interest is tax deductible.

TUI FIN509, MOD1, CASE1