Venture Capital Experience: A Vocabulary Lesson

Within the last 70 years, the way in which individuals and groups in the United States have gone about funding start up companies has changed dramatically.  With this change has come many different paths to funding one's company.

Today, there are 3 main sources of funding for start up companies: angel investors, super-angel investors, and venture capitalists.  Each of these funding sources has their own advantages and disadvantages depending on what a company is looking for.  But with new terms such as these types of investors, it's easy to mix one type of investor up with another.  Let's take a deeper look at who each one of these investors are and how each one differs from the others.

Angel Investors
Angel investors, usually referred to as simply angels, are individuals that use their own money to invest in start ups in exchange for most commonly equity in the company.  These investments are typically in the range of 50,000-200,000 dollars, however they can far exceed this range on either end of the spectrum depending on the angel.  In general, angels have in the single digits of companies that they are currently funding.

abc's Shark Tank.  Source: abc.go.com

In abc's recent television series, Shark Tank, contestants have a few minutes to give the judges their business pitch in order to convince at least one of the angel investors that their business is worth investing in.  At the end of the pitch, the angels ask questions and they make an offer to the business owner, offering a certain amount of money in exchange for a percentage of equity of the company.  The offers range based on the angel's valuation of the company and percent euity requested.  This show is a great example of the typical process one must take in order to obtain funding by an angel or group of angels.

One notable advantage that the angels have over venture capitalists is the quickness in funding a company.  Typically, receiving funding from a venture capitalist firm will average about six weeks.  Angels can also be more driven by relationships and the desire to be a part of a company again and therefore may be willing to settle for a smaller portion of a small.

Venture Capitalists
For companies that are willing to give up more equity in exchange for more capital, seeking funding from a venture capital (VC) firm is the route to take.  VC firms are managed by a group of investors called, not surprisingly, venture capitalists.  VCs will raise a pot of money for each round of start ups, typically at least 100 million dollars.  After the firm has found enough investors to get their desired pool of money, the firm seeks out companies to invest in.  A typical firm will look to invest in 15-20 companies for any given pool of money.

A VC firm knows that it won't make a profit on each company, and that's why they pour their money into various different companies.  Their hope is that one or two of the companies they invest in will eventually reach their IPO on a large public stock exchange.

Super-Angel Investors
Like angels, super-angels are are individuals looking to invest in companies in exchange for equity.  However, super-angels invest other's money in addition to their own, making them the middle ground between angels and venture capitalists in terms of amount of capital.  Typically, super-angels invest 500,000-2,000,000 dollars, but again there are always extraneous cases with extremes on both ends.

Super-angels are a very new category of investors when it comes to the market of investing in start-up companies.  They came about for the purpose to fill the gap of capital between angels and VC firms.  Because super-angels are able to invest about the same amount of money as a venture capitalist firm, do it a lot quicker, and ask for less than what a venture capitalist would normally ask, super-angels are proving to be a big threat to venture-capitalists.  With this new competition arising, it's evident that VCs will have to move toward being more efficient and being able to invest smaller amounts of capital to more companies.


Although these are the 3 main sources of raising capital for new start ups, there is another source of funding available to a wider array of companies called crowdfunding.  The most popular and successful website based on crowdfunding is Amazon's Kickstarter.com.  Here companies may pitch their businesses to the world and offer rewards for "backers" to buy.  The largest project thus far has raised over ten million dollars, although the average amount is five thousand dollars.  Although crowdfunding is a completely different ballgame, this alternative is still available to some companies requiring a small amount of capital.


The last phrase that gets thrown around a lot is incubator, and most common of the incubators, Y Combinator.  An incubator is a company that takes in early-stage companies to help them with all the aspects of starting their firm usually with the agreement that the incubator will get equity of the company in exchange.  Y combinator is a big threat to all these forms of investment possibilities for start-ups because they are ensuring their success when they actually help these companies refine their business for three months.  Although Y Combinator only gives out about 20,000 dollars to most companies, their expertise that they offer to the companies along with introducing them to other sources of funding is worth much more.  And when they're asking for only 2-10% of your company, who wouldn't take that deal?


I'm sure in the next few years we'll have many more confusing terms pop up in the world of venture capitalism and start-up funding, but I hope this explanation has helped with terms being thrown around today.