We can look at many companies that went public and made VCs A LOT.
A VC firm raises ‘funds’ from angel investors (called LPs).
Obviously, the return on some of these IPOs not only ‘makes the fund’ but can ‘make the firm’.
Not only does the VC firm make a 20% performance fee on the upside, but they also collect management fees every year.
The reputation that this one deal can give them makes it far easier to raise more capital for future funds, therefore resulting in more management fees.
For a $1BN fund, that is $20MM every year, which is split between the General Partners (GPs) of the VC fund.
Of course, if one of the portfolio companies is a Unicorn, then they get some (20%) of the upside as well.
The tech boom in Silicon Valley has of course created a lot of value in society, with products being used by hundreds of millions if not billions of people. The entrepreneurs who take this risk and retain equity become, in many cases, billionaires and this is only fair – as they are providing value at scale (and have to take some form of risk to achieve it). This also creates huge amounts of wealth for these investors, WHO ARE ALL ACCREDITED INVESTORS.
To me, that is not meritocratic.
Anyone over the age of 18 surely should have the ability to invest their capital into startups.
After all, people are able to put themselves into $10Ks of college debt at that age and, in many areas of the world, are able to gamble without restriction.
Yet they are not able to participate in the early rounds of companies such as Facebook, Uber, etc.
Now any wave of technological innovation often leads to wealth inequality.
These waves of innovation create vast amounts of wealth, and this is not unique to Silicon Valley.
It has happened throughout modern history.
The first great wave was steam power, which eventually led to the creation of the locomotive. Steam power fed the Industrial Revolution, which created fabulous wealth.
In the early 1800s, much of this excess wealth generated by steam power and the Industrial Revolution went into locomotive stocks on the London Stock Exchange, forming a bubble – which popped in 1850. The heyday of the railroad would be the 1880s and 1890s; so the Crash of 1850 was due to speculation and the wealth created by science, but the real job of railing the world would take many more decades. So despite the bubble bursting, America was left with an infrastructure of railroads that made intercontinental travel and shipping dramatically easier and cheaper.
The second great wave was led by the electric and automotive revolutions of Edison and Ford. The electrification of the factory and household, as well as the proliferation of the Model T again created fabulous wealth. But this excess wealth had to go somewhere. In this case, it went into the U.S. Stock Exchange, in the form of a bubble in utility and automotive stocks.
People ignored the lesson of the Crash of 1850, as that was a full eighty years in the past.
From 1900 to 1925, the number of automobile start-up companies hit 3000, which the market simply could not support.
This bubble was unsustainable and for this, and other reasons, the bubble popped in 1929 creating the Great Depression.
The main paving and electrification of the United States and Europe would not fully take place until after the crash, during the 1950s and 1960s.
The third great wave was the coming of high tech – in the form of computers, lasers, space satellites, the Internet and electronics. Again, the fabulous wealth had to go somewhere. In this case, it mostly went to real estate – creating a huge bubble.
You have a great idea for a start-up business and you are, probably, short on capital, so raising money is your first concern. You are going to need outside investor groups, Startup event therefore you need to know the difference between angel investors and venture capital firms. Less is known about angel investing as compared to venture capital, due to the privacy of their investments. However, these are the key points to consider in order to make the right choice.
1. Ease of obtaining financing
It commonly takes less time to receive funds from an angel investor, as obtaining venture capital funds is a highly rigorous process. Therefore, your business should meet all the investment criteria before being considered by a venture capital firm. The difficulty with angel investors may arise in case your business requires funding from several investors, as they could demand different terms.
2. Investment Size
The range of venture capital funding is larger than the one of angel investors. Angels act alone or in organized groups and invest their own money. Venture capital firms are corporate entities that pool money from a range of investors. Angels typically provide under $1 million, venture capitalists mostly above $1 million.
3. Stage focus
The focus of angel investors is typically the earlier or the seed stage of your start-up company. Venture capital firms focus on different stages of your business. Vc providers are much less likely to invest at the seed stage and they may provide second round financing after angels. Moreover, their purpose is to take your venture to the initial public offering stage and beyond.
4. Industry focus
Angel investors vary in investment areas and may allocate funds to a range of fields, frequently within their areas of expertise. Venture capital firms generally concentrate on emerging sectors such as technology or innovation.
5. Geographic Focus
Both business investors often prefer to invest within the vicinity of their offices. The purpose is to add management value to your company and to easily monitor all their portfolio companies.
6. Expected returns
Both angels and venture capitalists generally expect a high rate of return for their investments. Stereotypically, a venture capitalist may have higher return expectations than an angel investor.
7. Expected Control
Angel investors and vc firms are similar in that they expect a board position and possibly a consulting role. Both invest in return for an ownership stake in your company and for a certain degree of involvement, but venture capital firms will exercise even more control over your company.
8. Support and Expertise
Angel investors will more than likely provide support and advice to the start-up business. Vc firms generally possess greater expertise, as they prefer to lead ventures through successive funding stages.
9. Risk taking
A venture capitalist prefers to invest in a business that will offer security and a high return on investment. An angel is far more likely to be a risk taker and put money into a venture at the riskier seed stage.
Angel investors are also motivated by the desire to see innovative ideas get off the ground and become successful businesses, whereas venture capitalists are more motivated by profit.