Crowds, angels, and VCs: A short primer

Startup founders often lack the experience and collateral to qualify for bank financing, so they turn to private investors. Typically, founders offer ownership, or equity, stakes in exchange for seed money to start or grow their businesses. 

Angel investors are typically wealthy private individuals or groups investing their own money in the early stages of a company’s life. They might be “friends and family” of a company founder, or they might provide the next layer of financing once the friends-and-family round has finished. Traditionally, angels have been accredited investors with at least $1 million in assets or $200,000 in annual income. They receive partial ownership or become debt holders of the startup. One large angel investing platform is AngelList (www.angel.co).

Venture capital companies are professional firms that invest in slightly more established companies, before those companies aim for an initial public offering or to be acquired by a large firm.

In the wake of the 2007-2008 financial crisis, legislation aimed at boosting startups’ ability to raise capital has created another funding platform known as equity crowdfunding (crowdfunding that offers stakes in startups as opposed to product discounts or other considerations.) With crowdfunding, as of May 2016, both accredited and non-accredited investors can invest small amounts (they vary depending on the assets of the investor) in startups. One noted equity crowdfunding platform is wefunder.com. 

“It’s still very early in the game for crowdfunding,” says Ethan Mollick, Ph.D., MBA, a professor at the Wharton School of the University of Pennsylvania who studies the market. “Right now, the deal flow is small. Ultimately you want crowdfunding to surface deals that can’t get done through angel investment and private equity, but right now it is mostly deals that have been turned down by those investors,” he says.