Angel Investor vs. Private Equity: Whom Should I consider for Funding?
When it comes to investing in your start-up you will have a number of questions. One such question which you would think about is “Angel Investor vs Private Equity: where should I secure funding from?” It is well known, that if you are not using bootstrapping or other methods to finance your start-up, then funding is your last option.
Funding can be carried out in different ways. There are different sources which you would consider to fund your start-up. However, you would also be thinking about the equity stake and dilution options that investors would want. On comparing Angel Investors v Private Equity, both forms of financing can be utilized by your start-up.
When it comes to investing in your start-up you will have a number of questions. One such question which you would think about is “Angel Investor vs Private Equity?
All entrepreneurs have a main goal to develop their business and achieve their required outcomes. For this, there are different sources of financing available to them. A founder would have to choose the best mode of financing the start-up. The method of funding must also be viable to all the founders.
Hence you must research all the available options for funding the start-up. If you are confused between Angel Investors and Private Equity, then this article would provide you guidance on whether to secure funding from an angel investor or a private equity investor.
Angel Investor vs Private Equity
If you are a first-generation entrepreneur or a new company, then you would require some form of capital to fund your business. Such capital can be obtained from different sources. If you want to take a loan from a bank, then there are various compliance burdens associated with the bank. Apart from this, you would also have to repay the loan to the bank. This would not be a viable option for all founders, as they would not have sufficient capital to return the money borrowed.
Bootstrapping is another way to secure funding. However, there are difficulties with this form of funding such as a limited amount of resources. Apart from this, you may consider investment options from your friends and relatives. They may be willing to provide you with resources and finance. However, they may not be able to fund your business fully.
Your last option is securing funding from investors. In the funding circle, there are different types of investors which you can consider. However, you would have to do your research before dealing with investors.
Angel Investor vs Private Equity is a typical funding option that entrepreneurs choose. In order to understand the differences between Angel Investor vs Private Equity, we must first understand the terms individually.
What is an Angel Investor?
An angel investor is usually a successful entrepreneur or a retired individual that wants to invest his own funds in your business. Over the period of time, many founders and entrepreneurs preferred angel investors for funding.
Angel investors are individuals, who have funded businesses around the world. Hence they would have the requisite experience when it comes to funding your business. If you are successful at convincing them, then your business can secure funding up to million dollars. After carrying out initial funding, they may even fund your further during investment rounds.
As there is an apparent risk in funding your newly formed business, they usually take equity share or percentage of equity in your business. They would also want to manage your business on making decisions. You may think that convincing an angel investor is quite simple, however, it is not as easy as it looks.
You have to plan your business and explain the same in the pitch deck and funding rounds. You might have watched “Dragons Den” where different entrepreneurs pitch their business plans to investors. Only if an investor is impressed by their business, they would be willing to fund the business.
Angel investors not only provide you with capital but also mentor your business. Hence securing funding from an angel investor may be viable for you.
Private Equity: What does it mean?
You may think when comparing the terms Angel Investor vs Private Equity, that they are the same. However, they are not. In fact, the term private equity deals with a company that successfully invests in your business with investment from separate funds.
Private Equity is a separate field of investment, where a private equity firm is interested in investing in other financial firms that manage the money of businesses and individuals. Such financial firms would include Pension Funds, Insurance Funds, and other funds that manage the investment of HNI individuals.
Such firms would raise funds and investments from different industries. They would be willing to invest in your start-up in exchange for a large equity stake in your business. As they are pitching a lot of investment, they would put their management responsibilities to use to increase the revenue of the business. Higher revenue for them would yield a higher return.
Types of Private Equity Firms
There are different types of private equity firms which carry out investment. Unlike Angel Investors, there are two categories of private equity which are Venture Capital and Leveraged Buyout.
- Venture Capital- Venture Capital is a form of investment capital provided by Venture Capital Firms. They have a separate fund as a result of pools of investment. Venture capital firms, tend to invest in small start-ups and in return want equity percentage from the start-up. The risk involved is high, as they are investing in a start-up that is in its inception stage.
- Leveraged Buyout- Usually these forms of private equity firms are present in the market for a longer period of time. When investing, they use their controlling interest and equity stake in the business to work towards a greater return.
Dealing with a Private Equity Firm
When considering funding between Angel Investor vs Private Equity, you would have different criteria to deal with them. For an Angel investor, you would have to develop a business plan and pitch deck. After this, you have to successfully convince the investor to fund your start-up.
However, when dealing with a private equity firm for your funding, you must have the following:
- First and foremost, you must have a detailed business plan with different sections dealing with marketing, finance, and consumer demand. The business plan must also provide reasons why you need financing.
- How much funding you would need? Way of Funding?
- What is the Return on Investment (ROI) for the Private Equity Firm? You would also have to prove that the rate of return can be easily secured through this investment.
- Future Goals of the Business.
If you have successfully convinced the firm, then they would outline their requirements in an Information Memorandum (IM). The terms of the deal and investment would also be mentioned here. You must take help from your lawyers to vet the terms of the IM and also understand its significance in order to avoid legal hurdles.
After this, they would provide you with an offer. With this complete, you would have to provide a lot of information to the private equity firm. It would be ideal to get in your lawyers and accountants to provide such information.
Now that we have understood the terms Angel Investor vs Private Equity let us go into understanding their differences.
Difference between Angel Investing and Private Equity
An entrepreneur can choose the above modes of funding the start-up. However, it is essential to understand the key differences before going ahead.
Amount of Investment
An Angel Investor would be typically willing to invest up to USD 1 Million. However, not all angel investors would be willing to invest such a large amount. Some angel investors would be willing to provide USD 100,000 for your first funding.
Private Equity firms are known as large players in the funding business. Private Equity firms such as Venture Capitalists would be willing to invest in your business. They would provide more than USD 1 Million.
Equity Stake
Whether you choose to utilize angel investors or private equity for funding, an equity stake would be preferred by these investors. However, the percentage of equity may vary depending on the criteria of the investor.
An Angel investor would demand about 20 to 30% of equity stake and ownership in the business. With this, the investor would also be a mentor to the business.
A private equity fund may demand 30 to 35% of the equity stake in the business. All private equity firms are aggressive. They would want to take part in managing the business.
Responsibility of Management
An angel investor would act as a mentor of the business. All business decisions taken by the founders would be guided by the angel investor. They are not aggressive when it comes to controlling interest in the company.
However, a private equity firm is more aggressive and takes responsibility to secure the maximum returns from the business. The firm would also have the power to oust the existing management if the state of affairs of the business is bleak.
Documents
There are a lot of documents exchanged in the funding process. An angel investor during the funding process would want the founder to provide a business plan and present the pitch deck.
The documents required from the founder are similar for private equity.
Who to consider for funding: Angel Investor vs Private Equity?
On comparing angel investors vs private equity, you have to consider all criteria before choosing your preferred mode of investment. As an angel investor would have individual experience in dealing with the funding process, he would be more of a mentor to the business.
If you want a higher return, then you can consider private equity. However, they take a more aggressive approach in management decision-making. They also have the power to make critical decisions for the business.
Conclusion
Now that we have provided you with the differences between Angel Investor vs Private Equity, you can go ahead with selecting the preferred mode of investment. However, always conduct research and use diligence in choosing the mode of investment.
Going ahead, if you have any queries please feel free to contact us.
