Private Equity vs Venture Capital vs Angel Investors- Who to consider for funding?

Funding would be required for every entrepreneur irrespective of the stage of business. There are different options to consider for funding your business, however, not all options would be viable. Hence it is important for you to consider all the relevant options for funding your business.

The common sources which entrepreneurs prefer to use are bootstrapping and finance from friends and family. However, on negating such options you would ask “what is the difference between angel investor and venture capital and private equity”? If you are still confused, then this article would clear all your doubts.

Let us go into understanding the difference between angel investor and venture capital and private equity.

Angel Investors- Who are they?

Angel investors are also known as seed investors. These investors are ready to fund your business, if you manage to convince them about your idea and business plan. Usually angel investors are retired individuals or entrepreneurs who want to use their past experiences in mentoring businesses.

They would only mentor a business, if they are interested in the business plan and idea. You would also have to convince them as to why they should invest in your idea. Angel investors are individuals who are ready to help the next generation of start-ups.

An angel investor would only work through closed groups. As per a report, seed funding and angel investment provided about USD 3 Billion during the fourth quarter of 2020. This shows that entrepreneurs and start-ups prefer angel investment during their inception phase. Many entrepreneurs prefer angel investment, as they act as investors as well as mentors for the business.

At the end of the day all investors want sufficient return on their capital. However, an entrepreneur would want some external mentorship along with the investment. Angel investors usually invest around USD 10,000 to USD 200,000 in a typical funding round. 

For example, the American money seed start-up accelerator, Y Combinator, usually provides more than USD 100,000 as an angel investment for a start-up. Popular names which have secured funding from Y Combinator include Airbnb, Stripe and Coin base.

Of course an angel investor would want a specific percentage of equity in the start-up and they usually go for 20 to 30%.

From the above, it is clear that angel investors concentrate more on investing in budding start-ups. When comparing Private Equity vs Venture Capital vs Angel Investors, now we know that angel investors typically act as mentors and concentrate more on seed funding.

Venture Capitalists- Who are they?

Venture capitalists are more known as the big bulls in the funding field. They are firms that invest in different companies and have a fund set up separately for venture capital investment. Venture capitalist firms are more interested in the idea and product of the start-up and scale investment accordingly.

Usually venture capitalists are a diverse group of investors who are willing to take high risks. As an entrepreneur, you would prefer funding from a venture capitalist after securing the initial seed funding. For reducing the amount of risk, such firms tend to diversify their investment. For example, a venture capitalist would pitch investment around USD 10 to 15 million in a budding start-up. Like this they would invest in several start-ups, to diversify their investment options and reduce the amount of risk.

Technology based start-ups are the preferred investment option for different venture capital companies. However, if you come out with a disruptive product, they would be willing to invest in your product, even if you are from the traditional sector.

While they tend to invest more than a typical angel investor, they would require more equity stake in the start-up. They also put their experience in managing the board of the organisation. On differentiating between Private Equity vs Venture Capital vs Angel Investors, we can come to a conclusion that Venture capital investments is for your business only when you have secured the initial seed capital.

What is Private Equity?

Private Equity is also known as PE. PE firms tend to raise investments from funds managed by pension companies and insurance companies.  They secure money by investing in different funds. Through this their mode of securing returns is diversified.

The investment amount made by a private equity firm is of a larger value. Typically, there are private equity market players willing to invest between USD 5 million to 50 Million. However, there are different classes of private equity players in the funding field.

The main goal of a typical private equity firm is to understand the requirement of an existing company which has plans to diversify its business.  They provide the necessary funding to the business to achieve its goals. PE firms provide this funding for a large proportion of equity stake in the start-up. Players in this field are more aggressive than their counterparts. Private equity firms would only target companies and start-ups that have a big market size.

Now that we have understood the meaning of private equity vs venture capital vs angel investors, we will move ahead to the differences between the three.

Difference between angel investors and venture capital and private equity

It is important to point out the differences between the above to understand the way of funding. 

Investment Value

When it comes to Angel investment, then the value of an investment can be anything between USD 10,000 to USD 200,000 in a typical funding round.  Compared to this, Venture Capitalists and Private Equity firms would provide an investment of more than a million dollars.

Stage of Investment

Angel investment funding is usually considered in the start-up stage of the business. Such a form of investment would only be utilised by the entrepreneur in the beginning.

Venture capital investment would be utilised in successive funding rounds of the entrepreneur’s business. 

In comparison to the above, PE firms would only target and fund companies which are planning to diversify their activities.

Equity Stake

Angel investors would usually consider an equity stake in the company ranging between 20 to 30%. Venture Capital and Private Equity Players would usually prefer more equity stake in the company. Around 30 to 40% equity stake would be preferred.

Amount of Risk

It is obvious that there is more amount of risk in Angel Investment when compared to Private Equity. More risk is present in Angel Investment, as the angel investor is investing in a start-up that is in its infancy stage of business. In comparison to Angel Investors, the amount of risk is less in Venture Capital and Private Equity investment. However, all funding options have some form of risk.

Management Control

An Angel investor would be more of a mentor rather than an aggressive board member. It is obvious that the specified rate of return is required by him. However, the strategies adopted in managing the business would be different in comparison to the of aggressive strategies used by VCs and PE board members.

Private equity vs venture capital vs angel investor: Funding Criteria

Now that we have provided the meaning and differences between an angel investor and venture capital and private equity, the ball is in your hands to choose the mode of funding.

If the methods for securing finance such as bootstrapping or relying on investment from friends and family are exhausted, then you have the option to secure funding. As an early-stage entrepreneur, you would prefer funding from an angel investor, as they are the source of providing you seed funding.

Once you have established your business, if you want more capital then you can choose Venture capitalists to fund your business. If you want your business to secure its goals and reach new heights, it is time to bring in the big PE players.

Conclusion

Funding is required for all entrepreneurs. The mode of funding would depend on the requirements of an entrepreneur. If your start-up requires initial seed funding then secure this from an angel investor. For further funding, you can consider Venture Capitalists and PE firms. 

Going ahead, if you have any queries please feel free to contact us