User:Golowdown/Funding gap

DEFINITION / WHAT IS When used in a private equity setting, the expression funding gap refers to the problems that early stage ventures face in raising capital from third party investors.

Entrepreneurs typically turn to their family and friends first for seed stage financing.

However, turning to relatives for additional rounds of funding may no longer be an option when funding needs grow.

HOW CAN IT BE OVERCOME

While friends and family can rarely contribute more than a few hundred thousands dollars, VC funds rarely consider investments under $ 1 to 2 million dollars. Angel capital helps bridge the funding gap that develops between seed funding from friends and family, and later stage venture capital investments. Angel capital provide a valuable source of funds to businesses that have exhausted the amount of money they can raise from friends and family, yet remain too small in size for venture capitalists to consider.

While commercial banks often are reluctant to lend to businesses with a limited financial history or negative cash flow. Angel investors help close the funding gap for early stage businesses, by providing capital in the form of debt and / or equity when other sources of funding are less accessible.

TRENDS

In recent years, the funding gap has widened, with venture capital firms moving into later stage investments with greater funding needs. The growth of angel investor networks, loose groups of angel investors often organised on a city or state basis, has enabled angel investors to move into the space traditionally occupied by venture capitalists. Together, angel groups can finance amounts up to $1 million and above in any single round, while angel investors would typically invest between $10,000 and $100,000 individually in any single transaction.