Early stage outside equity investors are angels and venture capitalists. Venture capitalists tend to come in later on deals, and angels seem to prefer more hands-on involvement with less initial investment. The SBTDC's Charlie Penner provides an overview of how these types of financing work in Michigan.
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As Charlie Penner, Regional Director of the SBTDC, mentioned in his first segment, the first choice an entrepreneur has to make is between debt and equity, and most entrepreneurs receive their first financing from friends and family. In this segment, Charlie discusses outside equity. There are two types:
- Venture capitalists have focused interests. Firms tend to focus on one field to the exclusion of others. In Michigan, venture capitalists tend like to target business to business opportunities with proven markets.
- Angel investors range from sophisticated groups to high net worth individuals. As echoed by Terry Cross, angels bet on the individual entrepreneur and typically make investments under $1 MM.
Both sets of investors look for outsize returns which typically come from risky investments. However, in Michigan, angels and venture capitalists have begun to hedge their bets a bit by focusing on companies that are already demonstrating some market traction.
Additional Links:
- This link gives good tips on getting funding from friends and family which often precedes outside equity investment.
- Angels tend to invest locally because they like to be involved in the businesses they invest in.