There comes a time for many entrepreneurs (and would be entrepreneurs) where they simply need cash to make any further progress. Unfortunately, for too many startup people, capital raising equals Venture Capital (VC). However a VC is often not the right choice for a large majority of startups, and too many entrepreneurs get overly frustrated with the process of pitching to VCs, ultimately give up, and have little (if anything) to show for it.
In the early stages of a company, many entrepreneurs use “friends, family and fools” (FFF) money. This is within reason fine, but its important to remember that in most cases these people are not sophisticated investors, most likely not understand your business and don’t really provide you one critical service that you absolutely need: validation!
Your family will generally give you money because they have likely known you for most of your life, and you have somehow managed not to manifest career-criminal tendencies. If you’ve done well at school, have been able to hold down a job, and are perceived as being “reasonably intelligent” that’s all a plus. This is basically the degree of “due diligence” that this friends/family group as investors will likely go through.
Kickstarting an idea, is the best way to describe FFF money, and is often used for simple things like a computer, software, and basic facilities to go from A to B.
An informal investor or informal (known as a business angels or informal investor, is an individual who provides capital (personal funds) for a business start-up, usually in exchange for a convertible bedt or equity. A small but increasing number of informal investors organise themselves into informal groups or informal networks to share research and pool their investment capital. In the past few years we see a rise in syndication: the emergence of networks of informal groups, through which companies that apply for funding to one group are then brought before other groups to raise additional capital.
Informal capital fills the gap in start-up financing between “friends family and fools” who provide seed funding, and venture capital. Thus, informal investment is a common second round of financing for high-growth start-ups, and accounts in total for almost as singnificantly more money invested annually as all venture capital funds combined.
Informal investments bear extremely high risk and are usually subject to dilution from future investment rounds. Because a large percentage of informal investments are lost completely when early stage companies fail, professional informal investors seek investments that have the potential to return at least 10 or more times their original investment within 5 years, through a defined exit strategy, such as an IPO or acquisition.
Informal investors are often (former) entrepreneurs or executives, who may be interested in informal investing for reasons that go beyond pure monetary return. These include wanting to keep abreast of current developments in a particular business arena, mentoring another generation of entrepreneurs, and making use of their experience and networks on a less-than-full-time basis. Thus, in addition to funds, informal investors provide valuable management advice and important contacts.
Venture Capital funding is providing capital to early-stage, high-potential, high risk, growth start-up companies The VC makes money by owning equity in the companies it invests in, which and usually have a novel technology or a business model in high technology industries. The typical venture capital investment occurs after the seed funding round as growth funding round (also referred to as Series A round) in the interest of generating a return through an eventual realisation event, such as an IPO or trade sale of the company. Venture capital is a subset of private equity. Therefore, all venture capital is private equity, but not all private equity is venture capital.
In addition to informal (angel) investing and other seed funding options, venture capital is attractive for new companies with limited operating history that are too small to raise capital in the public markets and have not reached the point where they are able to secure a bank loan. In exchange for the high risk that venture capitalists assume by investing in smaller and less mature companies, venture capitalists usually get significant control over company decisions, in addition to a significant portion of the company’s ownership (and consequently value). Every year, there are nearly 2 million businesses created in the USA, and only 600–800 get venture capital.
