All venture capital is private equity, but not all private equity is venture capital. In general, private equity investors focus on slightly more established businesses which are seen to be lower risk. Venture Capital is a form of private equity investment that focuses on early stage, high growth businesses, that are much higher risk. Venture Capital firms specialise in these early-stage ventures and taking on the higher risks in return for the opportunity of realising huge gains.
The types of funding offered by VC firms may vary, but usually fall under three categories:
If you have a business idea but need capital to be able to produce a full business plan or prototype product, then you are looking for pre-seed funding. While you not necessarily need to show any revenue, you will need to convince potential VC investors that there is a need or a market for your idea.
This is the riskiest type of investment for a venture capital firm but also can realise the biggest gains.
If you have a viable business or product but need capital to further prove out the product fit. then you will be looking for seed funding. You will, however, need to show you have a viable product or service and explain how the investment will grow sales and revenue.
'Series A' funding is usually related to businesses that have revenue flow that can demonstrate product market fit, but in order for the business to employ the relevant people and invest in sales and marketing, to take advantage of opportunities that are presenting themselves, they require investment.
Series B funding follows, for businesses looking to scale up. The sums involved in Series B funding are much larger than in Series A, and so investors require solid figures to back it up – proof of profitability and concrete plans for the next stage of growth.
A business that seeks Series B funding is usually doing so to enable to launch of a new product or to take their existing product into a new territory.
Thinking about exit from Day 1.
Venture capital investors will always have one eye on the next stage of investment. They will want to understand what impact your business strategy and their investment will have on the potential for making a return on exit.
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Angel Investors are high-net worth individuals investing their own money, or sometimes grouping with other ‘angels’ to invest, on their own terms. This is a form of private equity even though the money isn’t invested through a traditional private equity house or firm. Angel investors tend to deploy their capital in industries that they are familiar with or have experience in.
Finding angel investment often relies on having connections in your industry and is not as publicly available as other types of private equity. However, some ‘Angel groups’ provide a link between businesses seeking investment and potential angel investors.
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While venture capital and angel investors are types of private funding, the most common type of investment in businesses comes from conventional private equity firms or houses. Private equity firms are categorised by the size of their investment funds – from small-cap firms (less than €10m) to large-cap firms (more than €500m). Private equity firms raise capital privately from businesses, financial institutions and individuals to invest in their portfolio companies.
Like venture capital firms, private equity firms will often have a mandate be it industry, sector or geographical area they normally invest in. Where private equity firms differ from VC, however, is the size of the investments they can make and the maturity of the businesses they tend to invest in. While VC firms and angel investors are focused on early-stage funding, private equity firms will invest in businesses more mature businesses so long as there is the potential for substantial growth.
The portfolio companies tend to be more mature, with sustainable income and growth. However, the rule of thumb for PE investors is the ambition to more than double the value of their investment in three to five years which can be challenging and risky.
To get private equity investment, you will have to demonstrate that your business is not only profitable but is scalable with a high degree of growth potential.
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Ultimately, all forms of private investment exist to make money for the investors. By helping your business grow, they are seeking to make significant profit. It is always worth remembering this when looking for private equity investment. Whether it is venture capital or private equity, your investors want to be assured of significant growth in the value of their investment and will always be mindful of their exit strategy. Your investors will always have one eye on the next phase, whether that is selling the business, taking it to the public markets or to another PE firm. You should do the same.