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Many would be familiar with angel investors thanks to shows like "Shark Tank". These are usually ultra-wealthy individuals that have made their fortunes in business (or perhaps celebrity, family wealth, etc), who are looking to invest in a portion of their money into businesses in the very earliest stages of their journey. This can be at a time when a product or market has yet to be established, or even when ideas and design still need tinkering. In exchange for a chunk of capital, angel investors will seek ownership over part of the business; perhaps somewhere between 10% and 40%.
There is a lot of risk taken on by angel investors as the unknowns are significant. Will the product be successful? Are their new partners good managers? Will I be able to sell my share of the business at some point in the future and for how much? These questions do get resolved over time, but the very nature of the types of businesses that are being funded means that many will such early stage businesses will end up failing.
The next phase of a business' life (if they survive) is usually the growth phase, which leads to the world of the venture capital (VC). This is where the initial product and market have been established and operating cash flows are now positive (i.e. there is a viable business). Some companies will only have modest growth opportunities at this stage (e.g. local dentist), whilst others may have a world of growth opportunities. This may be growth into new locations or growth into new products (or both) and is the opportunity for a business to leverage a successful business model.
Venture capitalists are the main investor at this stage, bringing to the table not only capital, but also expertise and experience. VC investors will generally be much more involved in an investee than angel investors and will likely provide a team of skilled practitioners to help with the successful transition from small business to established enterprise. This may include help with navigating new markets, managing staffing needs, negotiating contracts and working towards floating on the local stock exchange.
VC investors also take on a lot of risk and generally seek returns of up to 10 times invested capital over 5-7 years. This an annual return of over 40% and is much higher than what would be expected by investing in companies on the share market. But as with angel investing, VC investing is primarily only accessible to the ultra-wealthy. While there are some pooled investment funds offered by VC firms to smaller investors, these still have added complexities beyond simply investing in a listed share fund.
Due to the nature of VC transactions, capital is generally locked away for a lengthy period of time and inaccessible. Furthermore, transactions usually involve staged funding, requiring investors to make semi-regular contributions of capital to investee businesses (through the VC fund). And finally, additional capital may also be needed to sure up investees with temporary struggles. Thus, investing in businesses at this expansion stage requires specialist investment skills, as well as business management competence - which is why VC investors can generally warrant high returns.
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