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Venture Capital and Angel Investments

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Mr. John Smith has inherited $18,000,000 and would like to start his own business. One of the financial consultants suggested for him to become a venture capitalist while another consultant suggested to him to become an angel financer. He is still confused as to what to do because previous consultants did not answer all his questions clearly.

Since Mr. John Smith is not fully satisfied with the previous consulting services, he is looking for a new consultant who can satisfy his needs by answering all the questions. He has heard a lot of good things about you and is interested in receiving your advice.

Read the information in the background material, look for more information, and answer the following questions:

1) Would you recommend Mr. Smith to become a venture capitalist or an angel financer in USA? Please explain your reasoning.

Mr. Smith would also like you to answer the following questions:
1) What are the risks involved with both venture capital and angel investing?
2) What are the potential returns from these two types of investing?
3) What are the main differences between these two types of financing?
4) Is angel financing better than the venture capitalist? Please explain your reasoning.

It may not be wise to recommend Mr. Smith to use all the funds ($18,000,000) to become a venture capitalist or an angel financer in USA. It is important to invest some funds in other countries to diversify risk. The Indian economy is an emerging economy. Therefore, it may be wise to invest some money in India to become an angel investor.

2) Would you recommend Mr. Smith to invest some funds in India to become an angel financer? Please explain your reasoning.

In your answer to the above question, Mr. Smith would like you provide information on the risk involved and potential return from investment in India together with other necessary information that you think should be provided in the report.

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Solution Preview

Would you recommend Mr. Smith to become a venture capitalist or an angel financer in USA? Please explain your reasoning.

I would definitely recommend Mr. Smith to become a VC or angel investor in USA. Tremendous opportunities exists in terms of investment opportunities in several high growth and exciting industries such as technology, healthcare, internet and mobile, etc. and VC's as well as angel investors have gained tremendous returns by investing wisely in start up companies in such industries. However, there are a few points that Mr. Smith should keep in mind. He should hire an experienced team of fund managers or partner with an experienced, well connected person with previous experience in this industry. As Mr. Smith does not have prior VC or angel investing experience, he can get trapped in terms of making wrong investments and thus, he needs a sound investor as a partner or employee in this field. Further, he should not put all the funds inherited by him in this field because even though returns are high, there are potential risks with such VC or angel investing. He should selectively invest in businesses after conducting extensive due diligence about the company, its products/services, potential revenues, valuation and other aspects with the help of professionals before making the final decision.

What are the risks involved with both venture capital and angel investing?

There are many risks involved with both VC and angel investing. As angel investors and VC invest in pre-revenue or early stage companies with innovative or unique products, they provide services or business models with the hope that such businesses will grow or scale up in the future. Additionally there is hope that this will allow multiple ...

Solution Summary

Mr. John Smith has inherited $18,000,000 and would like to start his own business. One of the financial consultants suggested for him to become a venture capitalist while another consultant suggested to him to become an angel financer. He is still confused as to what to do because previous consultants did not answer all his questions clearly.

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Rhonda Allegro has spent most of her spare time in the last 10 months either in the library at the local university or at the Small Business Development Center (SBDC) housed there. A little more than a year ago, she decided to launch a retail music store specializing in musical instruments, supplies, and hard-to-find sheet music and music books. She also plans to set up a "marketplace" between music students and teachers, collecting a finder's fee for each match-up. Rhonda set a goal of developing a complete business plan within a year, and now, 10 months later with her plan completed, she is ahead of schedule.

Rhonda was the creator of the plan, but she had plenty of help building it. She used the services of the university's SBDC, a friend who is an accountant at a Big Six firm and a friend who is an attorney. She thought that her plan was a good one, but she was excited when the SBDC counselors encouraged her to enter a statewide competition sponsored by a local venture capital firm for the best business plan. She could hardly believe it when her plan won in the retail division!

Now, all that remains is launching the business. Rhonda has $75,000 that she plans to invest in the business, but her financial forecasts indicate that she will need another $650,000. Two banks already have turned her down, both citing the risk involved in small business startups. One of the SBDC consultants suggested that Rhonda consider searching out equity capital. "That sounds promising, but how do I find equity investors? Where do I start my search? What are my options?"

1.Answer Rhonda's questions.
2.Which equity sources would you recommend to Rhonda? Explain.
3.What are the advantages and disadvantages of using equity capital?

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