Table of contents

Angel Investor Vs Venture Capital Vs Private Equity

Table of contents

What is Venture Capital?

Venture capital is a kind of financing that funds high-risk startups with high growth potential. But the main question here is- which kinda startups do VC firms choose to invest in?

The startups that have good ideas or technology, may or may not have revenue, but have the potential to achieve high growth that balances out risks associated with failure are chosen by VCs to put in their capital for growth. 

As time progresses, upon witnessing growth, VCs may want to acquire the whole or a substantial part of the startups. 

To sum it up, we can say these firms essentially contribute to entities promising growth potential and developing the entrepreneurship landscape. 

Wondering what makes these firms unique? The next section enlists the features of a Venture Captial. So what are you waiting for? Keep Scrolling!

Characteristics of a Venture Capital

  • One of the primary characteristics of Venture Capitalists is that they back new and innovative ideas. These firms are known to enter the picture in the earlier stages of a company and propel them toward success and growth.
  • It is true that VCs invest early on and invest large amounts in comparison to angel investors, but they are also known to invest just enough sums, which strikes a balance between fueling progress and retaining the entity’s autonomy.
  • Apart from financial backing, VCs are also known to offer invaluable guidance and strategic mentorship. Based on their expertise, they assist startups in refining strategy, providing networking opportunities, and pushing revenue bars.
  • Why does anyone invest – To earn returns, right? VCs are no different. Their primary goal is to earn significant returns in a certain period. As mentioned in the definition “What is Venture Capital” these firms usually target entities who have the potential to achieve growth, or better be the market leaders in the future. 
  • VCs seek equity in exchange for their capital infusion in the startups. This alignment provides VCs with a piece of the pie when their investment starts growing. 

Conclusively, we can say that VCs act as catalysts in the growth of startups with potential. They embody a symbiotic equation between risk and reward with their capital, strategic guidance, and networking circle. This way VCs act as fuel in the entrepreneurial spirit and redefine the Indian startup system.

What is Angel Investor?

The next in line is Angel Investors; as the name suggests are investors that act like angels to early-age startups. They infuse a significant amount of cash in return for which they get equity or convertible debt in return. 

Often known as Seed Investors, they invest in businesses that could even be at pre-revenue stages with very few or negligible customers at bay. Seed investors also provide financing to research business ideas, develop prototype products, or even conduct market research.

Characteristics of a Angel Investor

  • Angel investors, as mentioned earlier, inject capital into startups that are at the infant stage and have just commenced operations.
  • Usually, these investors are affluent individuals who primarily deploy their personal capital to facilitate business expansion. Their investment is driven by their confidence in entrepreneurs and their business model. 
  • If someone thinks investment is just about money, then it’s untrue. Many angel investors apart from providing backing financially, also offer valuable guidance. They leverage their expertise and network to support the company and enhance their chances of success. 
  • Even though individual investments from angel investors may be comparatively lesser than those of VC or Private Equity, their cumulative contribution plays a pivotal role in the startups’ growth.

Before, we proceed further, do you know the various valuation methods that are used in industry to evaluate the value of a business? If not, tap here!

What is Private Equity?

Private Equity is a form of equity financing in which firms deploy their capital into companies that have demonstrated stable profits, cash flow, and debt management. 

They target companies that have crossed initial revenue generation and other nitty-gritty of the early-stage startups.

Characteristics of a Private Equity

  • PE firms target mature companies that are up to expansion or are in restructuring/ transition phases.
  • Like VC and Angel Investors, Private Equity firms not only provide financial backing but also work closely with the teams to enhance their strategy and support their growth objectives. 
  • PE Firms target not only substantial returns but also operational enhancement.
  • PE Investments are done to create value over an extended period. This process also involves strategic exits through IPOs and/or selling staking to other companies.
Angel Investor vs Venture Capital Vs Private Equity

Comparing the Trio

Now coming to the final section- a comparison of the trio and seeing how they measure up at different factors.

What’s the Growth Stage of Business in which they Invest?

  • Angel investors mainly target companies in their infant (seed) state and have the potential to achieve high growth (early-stage startups)
  • On the other hand, VCs invest at the startup stage.
  • Contrary to the above two, PEs target mature companies that have already showcased profits and stable cashflows and are looking to expand, restructure, or require a pivot in ownership.

What’s the Size of Investment?

  • Angel Investors invest capital from small to moderate amounts. 
  • A significant amount of funding from institutional investors comes under VC Funding. 
  • Coming to PE, their investment size involves significant funding from institutional investors.

How much are they involved in their Invested Companies?

  • Angel Investors are known to provide first-hand guidance and mentorship to their invested companies.
  • On the other hand, VCs are also known to provide strategic guidance to the companies they are invested in, but not as much as seed folks. 
  • Lastly, the private equity guys, who bring a heavy amount of funding are deeply involved in their invested businesses for strategic and operational support.

What does their Investment Team comprise of?

  • Angel Investment Team consists of Entrepreneurs/ past founders.
  • While the Venture Capital Investment Team includes entrepreneurs and/ or bankers.
  • The  Investment team of PE firms is mostly made up of Bankers/ Finance professionals

What do they get in Exchange for their Investment?

One of the main important questions is- what do these investors get in return?

Let’s understand-

  • Angel Investors usually gain equity in exchange for their funding. 
  • While Venture Capitalists are known to get Equity and Convertible Debt for their invested amount.
  • However, the type of return that PE firms receive is Equity with Leverage.

Here comes the end of our detailed comparison between Angel Investors vs. Venture Capitalists vs. Private Equity. 

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 And for more such informative articles, Stay Tuned🙂

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