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As a business heavily involved in startup funding and investment, our team here at Bure Valley Group wanted to offer this 2020 guide comparing private equity, venture capital, angel and seed investing. It’s common for even experienced investors to get these categories confused, which can have important implications for their investments. In this article, we outline the main features and distinctiveness of each one. We hope you find value in this content. To find out more about our own EIS and other investment opportunities, visit our portfolio page here. To enquire about our latest projects and funding, you can reach us via:
+44 160 334 0827
Seed/angel, venture capital & private equity – a comparison
Here is a brief outline of the main similarities and differences between seed/angel, venture capital & private equity investing:
Seed/angel investors are typically involved at the pre-revenue (or “startup”) phase of a business whilst venture capital tends to come afterwards – i.e. at the “pre-profit” stage, following initial funding to get the company off the ground. Private equity investing typically comes after this in the mid/later stage, once the business has established profitability and cash flow.
Each of the three types of investment mentioned above can involve large sums of money. Yet in general, the size does typically increase as the business matures. Seed/angel investment is often £10,000s to a few million, with venture capital up to tens of millions. The private equity stage can run into the billions.
An angel/seed investor can only invest equity since the business in question is still very young, and they make a poor debt investment. Rather, this stage usually involves an investment in exchange for agreement for future equity. Venture capital firms, on the other hand, typically invest in equity, preferred shares, and convertible debt securities – with the ultimate goal to own equity in the business. In short, business angels will usually function as a mentor whilst venture capitalists typically want a seat on the board. Private equity firms also usually invest equity but can often borrow large sums of money to enhance their internal rate of return (IRR).
This difference is clear. In short, the earlier a business it in its lifecycle, the more investment risk is likely to be involved. As the business grows into profit and establishes a strong track record, it becomes easier for investors to see its investment strengths and prospects.
Different types of people tend to feature in each of these investment types. For seed/angel investors, the investors are typically themselves successful entrepreneurs who have founded and exited companies, and who wish to capture the potential of other businesses within their earlier stages. Venture capital teams can comprise more of a mixture of professionals – perhaps including entrepreneurs as well as people with experience in investment banking. Private equity teams usually consist of corporate operators and ex-investment bankers.
Naturally, all three wish to maximise their returns substantially. Yet the earlier stages tend to bring high risk – as well as the opportunity for greater reward. As such, a seed/angel investor might hope to generate 100x returns or more when their investments work. Venture capital returns might be in the region of 10x when successful, and private equity perhaps 20% returns.
All three will, of course, want to engage in the appropriate due diligence when selecting a company to invest in. Yet the process and priorities of each can differ. Seed/angel investors, for instance, may wish to focus on the “qualitative” aspects of the company such as founders, product-market “fit” and other high-level considerations. Venture capital teams will usually also be interested in these areas, but here more concrete metrics also tend to come into play such as lifetime value of customers, margins and revenue run rate. At the private equity stage, teams will want to pay more attention to EBITDA, cash flow and other important financial metrics.
Seed/angel investors are typically individuals who are interested in a specific early-stage company as an investment opportunity. This is not always the case, of course, since funds do exist to enable such investors to commit capital to multiple prospects at the same time (e.g Enterprise Investment Scheme – EIS – funds). Private equity deals usually involve a team which is also interest in a particular business (in its later stages). Venture capital is the main difference here, where a team will typically manage a pool of money within a professionally-managed fund.
As you can see, much unites the worlds of private equity, venture capital and angel Investing. Yet there are also crucial differences to be aware of if you are interested in investing in particular companies. For business owners, it’s also useful to know some of the main differences and the similarities between them for the times when you may seek investment for your own company.
Interested in finding out more about the great EIS and other investment opportunities we currently he available at Bure Valley Group? Get in touch today to start a conversation with our team, and discuss some of the great investment memorandums we have available:
+44 160 334 0827