Part C. Drawbacks of investors

However, both business angels and venture capitalists cannot be considered an ideal means of funding. They also have drawbacks for the entrepreneur.

1. Can actually be deceptive. While the majority of angel investors truly look beyond the promise of monetary return, there are a few angel investors who are greedy and motivated by money rather than in promoting the good of the firm. They are less patient with new entrepreneurs and do not provide any mentoring or guidance during a company’s early stage of development.

2. Can be costly. In exchange for providing the needed startup capital for a new company, many venture capitalists often require a certain percentage of stake in a company, starting at 10-15% or more, and expect a large ROI for their exit. From their perspective, this is a reasonable exchange since they are investing in very young and risky businesses.

3. Active company involvement can lead to problems. It is not uncommon for an angel investor to have a certain amount of control in running a company. The entrepreneur may unwillingly be forced to give up some degree of control in order to meet their angel investor’s requirements, which can often lead to resentment on the part of the entrepreneur.

4. Lack of industry experience. This limited knowledge adds very little value to a company’s success. That is why entrepreneurs should only seek angel investors with proven experience in their industry.

4. Rarely make follow-on investments. Angel investors are less likely to make follow-on investments because of the risk associated with losing money when reinvesting in an unsuccessful company. On the other hand, venture capitalists have a different approach to follow-on investing. They tend to spend approximately 2/3 of their funds on follow-on investments, taking the opportunity to allow companies to expand while diversifying their current portfolio firms.

5. Do not have national recognition. While there are well-documented directories of venture capital firms available, there is no national register for angel investors. Due to these differences, angel investors do not have the national recognition as their VC counterparts. They remain hidden and mysterious but choose to do so in order to have a degree of separation from entrepreneurs, who may pester them with their business plans and telephone calls.

Ex. 1. Match the Russian word combinations with their English equivalents.

1. venture capitalist a. денежное обязательство

2. start-up financing b. Начальные инвестиции

3. monetary commitment c. уравновешивать, служить противовесом

4. business angel d. объединять финансы в общий фонд

5. seed money e. "бизнес-ангел", деловой "ангел"

6. tax return f. Возврат/ выплата налогов

7. to pool money g. жизнеспособность

8. to counterbalance h. начальное финансирование

9. viability i. венчурный капиталист

10. stock option j. фондовый опцион

11. voting right k. порождать, производить

12. to bring forth l. избирательное право

13. ROI (Return on m. прибыль на инвестированный капитал

Investment)

Ex.2. Choose the correct option:

1. Which statement is true?

a.. Angel investors provide capital for established companies.

b. Angel investors provide capital for companies that have succeeded and need to grow their market share.

c. Angel investors provide capital for companies that are in their early stages of development.

2. What is a typical investment for an Angel?

a. $25,000 b. $2 million c. $100

3. What will Angel investors sometimes do?

a. Invest in companies that haven't been founded. b. Invest in companies that are going out of business. c. Invest in companies that have established a large market share.

4. Do angels expect all their investments to succeed?

a. Yes b. No c. Doesn't say

5. Why are angel investors willing to take such high risk?

a. If a start-up succeeds it can deliver up to twice the investment amount.

b. If a start-up succeeds it can deliver up to twenty times the investment amount.

c. If a start-up succeeds it can return the initial investment amount.

6. 'Seeding a company' means:

a. to provide initial investment b. to provide late stage investment

c. to save a company from going bankrupt

7. In a best case scenario, how much might an angel make on a successful start-up investment of $50,000.

a. $80,000 b. $2 Milllion c. $150,000

8. Which example is given of a 'garage' start-up?

a. Google b. Microsoft c. Apple

9. Venture capitalists are:

a.the same as angel investors. b. different types of investors than angel investors. c. people who create start-ups.

10. Venture capitalists help a company to:

a. capture market share. b. begin a company. c. go into bankruptcy.

Ex. 3. Speak on the following issues:

a) advantages of venture capital by applying to a business angel;:

b) disadvantages of obtaining venture capital by applying to a business angel.

Ex. 4 If you are to start up a new business how VC firms and Angel Investors will score your idea in each of the following critical areas:

- market attractiveness - proof of concept - financial returns

- competitive advantage - plan readiness - funding sources

Text 3

Read the text and be ready to speak about the stages of venture capital investing using the words underlined in the text. Introduce the material by means of a mind map.

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