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Hi, I'm Jeff, and in this lesson, we'll learn about some of the alternate forms of financing available to organizations. So let's get started. One form of alternate financing is angel investors. This is an individual who provides funding from their personal finances to a business, typically receiving ownership equity or a type of bond in exchange.
Angel investors are similar to venture capitalists, which we'll discuss next, but there are some key differences. Angel investors may take riskier investments. They often provide initial funding for a company. They often invest in companies that they are passionate about. And an angel investor is often a single individual.
One example of an angel investor is Tim Ferriss, who wrote the book The 4-Hour Workweek. He has provided funding to companies such as Uber, which is a private taxi company. In addition to investing, he also provides consulting to these companies and acts as an evangelist for their products.
Next, let's talk about venture capital. This is funding during the beginning stages of a new company or venture to get the business started in exchange for owner's equity. Someone who provides venture capital is called a venture capitalist. Venture capital is often provided to startup companies that have the potential for high growth. These companies may not be able to fund this type of growth by loans from banks since this would be seen as too risky.
A venture capital firm, which can include multiple investors as limited partners, would evaluate the company, and if they agree, the firm will provide the funding. This funding is often provided for no longer than 10 years, and management fees and interest will be charged during the length of the funding. As compared to angel investors, a venture capitalist will assess risk more thoroughly, provide growth funding, and function as a group instead of an individual.
The final form of alternate financing that we'll discuss is private placement. This is the selling of any tradable asset by a firm to a closed set of investors. In other words, this is when a company offers shares of a public company in a non-public offering. These shares are not registered with the SEC, and they can be common stock, bonds, or promissory notes.
Typically, these are purchased by banks or investment funds. They have lower costs than stock, and a company can use this method to get funding more quickly. Smaller businesses that are expanding might be good candidates for this method of financing.
Next, let's talk about the relationship between risk and return as it relates to investors, and even owners. Risk return relationship is the concept that the higher a risk is, the higher a potential return is as well. Although it is not always the case, safer investments, those with less risk, will often return less profit on funds investment. While risky investments, because of the danger, should return more to the investor in exchange for taking that risk.
For example, someone who is nearing retirement might choose a conservative, less risky investment, such as CDs, corporate bonds, or government bonds, because they would not have much time to recover money lost to a risky investment. However, someone younger or someone who already had a portion of conservative investments might choose an aggressive investment, such as lower quality stocks, junk bonds, unproven companies, or even become an angel investor. Everyone must choose based on their own criteria.
All right, excellent job. In this lesson, we learned about three forms of alternate financing, angel investors, venture capital, and private placement. We also talked about the relationship between risk and return on investment. Thanks for your time, and have a great day.