Entrepreneurship and Small Business (ESB) Certification Practice Exam

Who are individuals that typically fund businesses in exchange for equity stakes?

1. Venture capitalists

2. Angel investors

3. Private equity firms

4. Government grants

The correct answer is: Angel investors

Individuals who typically fund businesses in exchange for equity stakes are known as angel investors. These investors are usually high-net-worth individuals who provide capital to startups or early-stage companies in exchange for ownership equity or convertible debt. Their investment is often motivated by a desire to support emerging entrepreneurs and help bring innovative ideas to market, alongside potential financial returns. Angel investors often play a crucial role in early-stage financing, offering not just funding but also mentorship, networking opportunities, and valuable operational guidance. Their involvement can significantly enhance the chances of a startup's success, as they often have experience in the industry and can provide insights that are crucial during the formative stages of a business. Other funding sources, such as venture capitalists, typically involve larger sums of money for more established businesses with proven models, which may come with higher expectations for rapid growth and returns. Private equity firms generally invest in more mature companies and, unlike angel investors, often take a controlling interest in the business. Additionally, government grants tend to provide financial support without requiring equity, thus differing fundamentally from the investment terms angels offer.