In the past, venture capitalists ruled the industry of equity financing for many reasons. These organizations provide for large sums of money in the millions to companies that require additional funding either for start-up operations or for expansion plans.And then along came the angel investors.
They changed the face of the financing in more ways for many reasons that will be discussed later. The term was taken from the theater world when investors who were willing to finance theatrical productions where other financing sources were unwilling to do so began to be called angels. Nowadays, angels can be found in virtually all industries lending a helping hand to promising entrepreneurs.
How were the angel investors able to change the face of equity financing and, thus, make them more dominant than venture capitalists? Here are a few reasons.
Changing Ways to Build a Product
In the olden days, being the first company to introduce a product often meant building a factory, hiring more people and spending for larger start-up costs. This business model required plenty of dollars to even get off the ground and when we say plenty, we mean in the millions of dollars.
In the modern economy, this is not necessarily so. Many successful corporations like Microsoft and Facebook started in dormitories, garages and other unlikely places mainly because of necessity. Such business models required just thousands of dollars to start on their full operations especially with the prevalent nature of the online world.
However, venture capitalists are unwilling to fund any start-up business that does not require a minimum of $3 million. The angel investors, however, were only too willing to invest in as little as $25,000 to promising enterprises. And since most individuals started out small in their businesses, the angel investors had a ready market.
Changing Lead Times
In this fast-changing world where sophisticated technology is discovered and developed every day, fast obsolescence is a fact of life. You must act fast in order to be the first on the market, be it in the introduction of a new product or in the development of an old product. Act slow and you will miss your opportunity to make a profitable mark by just a few hours.
Unfortunately, venture capitalists take too long to decide on the investment. They must evaluate the deal carefully and cautiously because of the large amounts involved. By then, you will have missed your opportunity.
In contrast, angel investors can decide whether to invest or not to invest in your company in one or two meetings. You can then take the next actions as soon as possible, be it to start operations or to find another angel investor. No time is lost.
If you have been approved for the angel investment, you can have the check in hand and the contract signed within a few hours. With venture capitalists, this step can also take too long for the company to catch up with the fast-changing technology.
Other factors that make angel investors preferred sources for equity financing among small to medium enterprises is their understanding of the experimental nature of the business; their willingness to forgo board seats knowing that it is overdoing matters in a start-up; and their ability to engage the company in simple legal terms.