Entrepreneurship and Small Business (ESB) Certification Practice Exam

Which type of investor typically takes on more risk for potentially higher returns?

1. Conservative investors

2. Angel investors

3. Government funding sources

4. Institutional investors

The correct answer is: Angel investors

Angel investors typically take on more risk for the potential of higher returns because they invest their personal funds into startups or early-stage companies that exhibit significant growth potential. These investors often seek out innovative ideas and are willing to accept the uncertainties associated with investing in unproven businesses. Their goal is to reap substantial rewards if the company succeeds, which often means they are involved in ventures that are speculative and carry a higher risk compared to traditional investments. In contrast, conservative investors typically favor lower-risk investments, focusing on capital preservation and stable returns. Government funding sources generally provide grants or low-interest loans, which tend to minimize risk for the funding entity while supporting community development or specific projects. Institutional investors manage large pools of capital with a more diversified and risk-averse strategy, often focusing on established companies rather than high-risk startups. Thus, the nature of angel investing aligns with the pursuit of high returns in exchange for accepting higher risks.