Private Equity vs Angel Investors vs Venture Capital

Which is right for my business? 

So you’re ready to raise capital. Periods of growth and acquisition are exciting times for entrepreneurs, filled with opportunities to create a brighter tomorrow for your company, your employees, and yourself. Finding the right sources for the capital you need to make it to the next stage of your company’s lifecycle is a crucial piece to attaining your goals. 

The amount of funding you are seeking will determine the right group of investors to approach, as will the lifecycle stage of your company, your desire to retain a controlling stake, and your risk tolerance. 

First, let’s define the 3 investor groups: 

Angel Investors

Angel Investors come in pre-revenue and invest smaller amounts into very early-stage companies: Often Angel capital is as little as $10,000 – $2 million.  Angel groups are often made up of entrepreneurs who have successfully exited and want to get back into the game without having to start their own company again. Angel investors know that they are likely not to see a return but a small chance they’ll be in on the ground floor of the next great thing. 

Venture Capital Groups

VC groups are often made up of a group of investors who have a higher tolerance for risk and bet on many smaller companies knowing that their investment is likely to pay off only a small portion of the time (but when it pays off, it pays off big). VC traditionally focuses on tech, biotech, and clean-tech companies. Venture Capital investors invest smaller amounts, usually under $10 million into earlier stage companies (pre-seed and Series A rounds of funding).  

This is the traditional VC description though in the past 5 years the lines between VC and PE are getting more and more blurred. 

Private Equity Funds

PE funds traditionally invests in companies that are more mature, they invest more and use debt and equity instruments in their investment portfolios. PE groups use the leveraged buyout model (100%) or take a controlling interest (51%+) in the companies in which they invest. This used to be true all the time but in recent years PE has taken a greater interest in promising early-stage companies. PE will often be actively involved in optimizing the operations of a company in whom they invest. 

Which kind of investor is right for you?

When you are deciding to raise capital it is important to be realistic about how much money you need, to be clear about what that money will do, and then to target the right investors. In addition to what you want, be clear on what you are willing to give up. There’s no such thing as free money, know that your investors will have their own expectations for their level of involvement and also what their exit strategy is. Aligning with the end in mind is important to forging a healthy path forward with the right investors. 

Here’s a list of what questions you should ask before pitching to investors: 

1: How much money do we need? 

Sometimes it’s wise to bring in a seasoned pro here to help evaluate your estimated needs vs your idea of what you can do with $10K. If, for example, you are raising money to get the word out, raising $10K isn’t going to get you very far.   

2: What are we willing to give up? 

Nothing is free in this life: What is acceptable to you? A Leveraged Buyout (LBO) is exciting when you are ready to make that move, whereas giving up 10% of control might be too much for an enthusiastic founder at the beginning of their growth. 

3: Why would someone give us money? 

If the answer is, because we need it, go back to the drawing board. See the future, envision the end-game, and then believe in it with everything you have and everything you are.  Your business plan should read like a prediction grounded in evidence. 

4: Would Aunt Martha understand our value proposition? 

Look at your pitch deck objectively. If you couldn’t give it to an outsider without industry knowledge then you’re too far in the weeds.  Revise, restructure, clarify.  It doesn’t have to be the most beautiful deck ever, it does have to be clear and compelling. 

Need help getting started? This is our specialty, drop us a line and we’ll review where you are, where you’re going, and what steps you’ll need to take to get you there.