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Overview of Angel and Venture Capital Investment

Cite this article as: Jason Mance Gordon, "Overview of Angel and Venture Capital Investment," in The Business Professor, updated March 14, 2015, last accessed April 2, 2020, https://thebusinessprofessor.com/knowledge-base/overview-of-angel-and-venture-capital-investment/.

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What are Angel and Venture Capital Investors

Angel investors and venture capitalist are equity investors in startup ventures. These individuals (or funds) provide much-needed capital at various stages of the startup’s lifecycle. Angel investors and venture capital funds are discussed in detail in subsequent lectures. Before doing so, however, it is important to understand at what point in the startup venture’s lifecycle equity investors supply much-needed capital to the startup’.

VC funding is generally divided into different stages of the business. These stages of financing are introduced below in order to demonstrate the role of funds provided by angel investors and venture capitalists. The varying stages of funding are dealt with in greater detail in subsequent lectures.

Early-stage Financing (Seed, Startup, Series A)

Early-stage financing is generally the realm of angel investors. It is rare that an early stage company will be capable of attracting a venture capital fund.

  • Seed Financing – Relatively is a small amount of capital provided to an entrepreneur to prove a concept or to qualify for startup capital.
  • Startup Financing – Is a moderate level of financing to companies for  completing product or service development and initial marketing. These companies are generally in business for less than 1 year, and have not yet sold their product or service commercially.
  • First Stage Financing – First-stage financing (commonly called “Series A” financing) allows companies to initiate full-scale manufacturing or servicing. This is the first stage of equity financing where venture capital firms become interested in investing.

Expansion Financing (Series AA, B, C, D, Mezzanine, Bridge Financing)

Expansion Financing is generally the realm of venture capitalists (including large private equity firms). Some angel investor groups may be able to fit into this class for certain startup ventures.

  • Second-Stage Financing – Second-stage financing (“Series AA, B, C, or D rounds”) provides orking capital for initial expansion of the company that is providing services, or is producing and shipping product, and has growing accounts receivable and inventories. This is the heart of venture capital investment.
  • Mezzanine Financing – Capital for major expansion of a company whose sales volume is increasing and that is breaking even or profitable. These funds are generally provided by large commercial lenders.
  • Bridge Financing – Helps IPO driven companies to obtain short-term financing that will be repaid when the IPO occurs. These funds are generally provided by large commercial lenders.

Acquisition/Buyout Financing (Management or Leveraged Buyouts)

  • Acquisition Financing – Provides funds to finance an acquisition of all, or a portion, of another company. These funds are generally provided by large private equity firms in combination with debt secured from large financing institutions.
  • Leverage Buyout Financing – This is a specific form of acquisition financing. Leveraged buyout financing combines debt from large financial firms, company debt issuances, management contributions, and private equity investments. This generally occurs when an operating management group seeks to acquire a product line or purchase the entire business from the current owners. Such a buyout may occur at any stage of development from either a private or public company.  The acquisition may be for the purchase of select assets or stock.

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