Business Angels Or Informal Venture Capital

Informal Venture Capital is equity capital provided directly to new and growing unlisted businesses by high net worth individuals- known as "Business Angels" – either individually or acting as part of a syndicate. The nomenclature of "Angel" dates back to early 1900s to wealthy individuals who invested in Broadway productions. Due to the fact that they were patrons for ideas and concepts which could not obtain capital from other sources, they were regarded as "Angels" by the artists seeking funds.

These are wealthy individuals who are prepared to use their financial resources to make risky investments based on their experience and interests. They may often be retired senior executives of major enterprises, or people who have sold their companies and now wish to use the money. Mostly they like to be actively involved in the management of the businesses they invest in. Along with their money, they also provide their commercial acumen, experience and expertise in growing the businesses they invest in.

The angels typically commit between USD 50,000 to USD 500,000 to a single business investment and make one or two investment in a three year period. There are, however, numerous investors who do invest larger amounts either individually or as part of an angel syndicate, They invest in all industry sectors and all stages of development, but primarily in start-up, early and expansion stags and characteristically have a preference for investing in companies located say within 250kms from their home or workplace. Most angels tend to invest in industry with which they are familiar with and in which they have direct commercial experience

According to an estimate by the Small Business Administration, USA, there are at least 250,000 angels active in the country, funding about 30,000 small companies a year. The total investment from angels has been estimated at anywhere from $20 billion to $50 billion as compared to the $3 to $5 billion per year (in 1000 to 1500 ventures) that the formal Venture Capital community invests. In fact, the potential pool of angel investors is substantially larger. There are about two million people in the United States with the discretionary net worth to make angel investments

For the business seeking funding, the right angel investor can be the perfect first step in formal funding. It usually takes less time to meet with an angel and to receive funds; due diligence is less involved and angels usually expect a lower rate of return than a venture capitalist. The downside is finding the right balance of expert help without the angel totally taking charge of the business. Structuring the relationship carefully is an important step in the process.

• PROS of angel capital
• CONS of angel capital
• Similarities with VCs
• Differences with VCs

They try to find profitable investment projects, collect and analyze the relevant information, and invest in a few investment projects, but they can enjoy the new venture investments without strong pressures for earning their opportunity costs. They may be proud of being paid more from their new venture investment activities, but they may not do their investment for the opportunity costs. However, venture capitalists do not have other jobs. They spend all of their time improving their performances in new venture investments. They try to find profitable investment projects, collect and analyze the relevant information, and invest in many investment projects. Their compensations will be decided by their performances in new venture investments. In other words, venture capitalists should earn their opportunity costs from their investment activities. This limits the venture capitalist's choice of new investment projects.