Question

-explain very clearly and to the point the reasons why angel financing carry extremely high risk.

-what is initial public offerings(ipos)

Answer 1

Angel financing:- If an investor or financer invests in a start-up business or new ventures, exchanging the benefits such as share in equity & ownership then this type of financing is called Angel Financing. These financings are usually done by affluent individual rather than companies. Such an individual is known as Angel Investor/ Angel funder/ Business Angel. The Angels investors provides monetary backups & supports to entrepreneurs/start-ups during early setup of businesses or during the expansion of the already existing small start-up. Although such investing/financing calls high risks, but also have potential/capable opportunities to generate huge returns.

Risks associated with the Angel Financing:-

1. Sometimes Angel investors invest in early stages of businesses, this could be inherently risky way to invest as nothing is known about the nature of business & how the market will respond.
2. Angel financers are unaware of the legal aspects associated with the small business leading to increase in regulatory risks. If the start-up turned out to be illegal, or there is any forging on legalities of the company, then investors entire funding would be wasted. This could be one of the major risk & might be very dangerous.
3. Start-ups & new ventures are in their exploring stages, they have lack of experience, which could also lead to failure of the entire business set-up. If the opportunity is not calculated wisely prior investing, it could bring loses to the investor.
4. Tougher to sell the shares in small businesses. Although there is an affluent investor behind the project, but losses cannot be minimized as public trading would not be possible for start-ups.
5. It can take time to generate profits by smaller firms as they are still struggling to create a hold in the market. Other investment options are have many saving options but in case of angel investing this is not the case. The Angel investors have to individually check the annual finances & growth reports, to analyze if they would make profit or not in long terms. The risk of losing a lot of money is high as duration in which the profits would be generated is unknown & unclear.

Initial Public Offerings:- The very first time when an private organization offers its stock/shares to public. This activity is performed by smaller or growing organizations so that they can expand so that they can trade publicly. In an IPO, the issuer ask for the assistance of the firm, which helps in evaluating what type of security is to be issued to the organization, the best offerings in terms of pricing, the shares amount to be issued & the timings & duration when the shares has to bring to market. The IPO is a risky investment.

Benefits:-

1. Risks & equities are diversified.
2. Exposure, public image & branding increases.
3. Access to capital.
4. Acquisitions & mergers would be facilitated.

Disadvantage:-

1. Legal, accounting & marketing costs are involved.
2. Lots of time, efforts & costs.
3. Information dissemination which may be useful for competitors, vendor, etc.
4. Loss of control over the organization hold.
5. Business & financial status needs the disclosure.