Alternative financing can take the form of an angel investor, which 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 can also be a means of raising money for a business that appears to have a very high earnings potential, but quite a bit of risk associated with it, meaning some of the more traditional means of financing wouldn't necessarily be available to them.
For the individuals and companies who are trying to build a business in this area, Mr. Bezos is known as an angel investor, because he's investing his own money into something that is not necessarily proven and also a high-risk area, with the expectation that there is a fairly high potential to get that money back--and a little bit more.
Generally, angel investors will expect to have a share of ownership in exchange for the funds. Those on the receiving end of the funds are not just going to pay the money back; the angel investor will now be part owner in the business that they invest in.
Angel investors typically:
A venture capitalist has or uses venture capital. Venture capital is funding during the beginning stages of a new company or venture to get the business started in exchange for owner's equity. This is provided to start-up companies that appear to have a fairly high potential, by a group of investors. Again, these companies are too risky for banks to loan them money. The bank doesn't want to take on that risk, which is how venture capital can work.
A group of investors will look at potential moneymakers that have a lot of potential but a lot of risk, and they will invest their money to get the business started and off the ground.
Investors and firms that offer venture capital are considered to be limited partners. They don't necessarily have a say in ownership of the business, but they do have owner equity in the business.
It's important to note that venture capital funds are typically going to be for no longer than 10 years. Management fees and interest are charged for loaning the funds to the start-up business.
Venture capitalists typically:
Private placement is the selling of any tradable asset by a firm to a closed set of investors. These assets are not offered to the public; they could include a non-public offering of stock, for instance, to a group of closely held investors in a particular company.
Private placement firms are not registered with the SEC. Because it's not a publicly traded stock, it's not governed by the Securities and Exchange Commission. Now, it can also be common stock, bonds, or promissory notes that are issued. Typically, smaller businesses are going to be the best candidates for private placement.
In addition, banks or funds are going to purchase these offerings of stocks or bonds at a lower cost than stocks, and the funding can be made available fairly quickly, because the parties involved don't have to go through all the regulation of putting an IPO out and having it regulated by the SEC.
Risk return relationship is the concept that the higher a risk is, the higher the potential return is. Safer investments will typically have lower returns than risky investments. Risky investments will typically tend to have higher returns.
Now, if you invest in something with a very low risk, then you have what is called a conservative investment. Conservative investments are generally considered very safe, but they don't return very much money.
EXAMPLEA certificate of deposit or a corporate bond, especially one that is backed by mortgage assets, or even a government bond are all considered to be very safe. They are very safe types of investment, but as a result, the return on them will be very low.
Aggressive investments, on the other hand, are investments that are typically very risky, but the potential for return is also very high. Angel investing, discussed earlier, is an example of this type of investment, because it involves investing in companies that are unknown, just starting off and with absolutely no history. There is a lot of risk involved. However, if the company does well then there's a potential for a very high return on investment.
Other types of aggressive investments include:
Source: adapted from sophia instructor james howard