When To Seek Angel vs. Venture Capital vs. Private Equity

During the most recent economic boom the level of capital invested by firms hit record highs. With this boom the traditional lines between Angel, Venture Capital and Private Equity began to blur. Competition for investments, and not just for the unicorns, drove a new reality where there was actually competition for the best investments.While current macroeconomic factors may make this feel like a thing of the past, its likely temporary.

With that in mind, what can founders, entrepreneurs and CEOs expect from these different segments of the funding world? First let’s compare them at a high level:

Investment FirmTheir Typical Firm SizeTheir Typical InvestmentTheir Typical StageTheir Risk Tolerance
AngelUsually individuals, but sometimes small firms10s of thousands to millionsEarly pre-revenue or pre-seedHigher
Venture CapitalSmall group of investors to full firms100s of thousands to millionsPre-seed to early series roundsModerate
Private EquityUsually full firmsMillions to billionsLater roundsLow

Angel Investors (AI) – often former entrepreneur’s who are now investing in new opportunities. However, Angel’s and Angel firms may also be professional investors hoping to capitalize on working with companies before VCs and private equity firms. Angel investors usually want to provide advice and leadership to maturing business leaders but generally will not involve themselves in the operations.

Venture Capital (VC) – firms or highly capitalized group of individuals who usually raise a “pool” of funds from multiple investors to make larger investments. VC firms often target a fund at a technology, vertical or opportunity. VC firms generally invest substantial amounts and will either have a high degree of trust in the businesses leadership or may seek to take on board seats or even place operational oversight for their investment.

Private Equity (PE) – are generally firms that are highly capitalized. Private Equity firms may have their own funds, may raise or pool capital from a variety of sources. PE firms also often add debt to raised capital for an even larger pool. This is known as leveraging or “leveraged PE”. Private Equity firms often want full operational control. They generally look for acqusition. While the original PE firms from the 1980s were known for borrowing to buy a company whose purchase price was lower than the value of it’s assets and then part the company out, many of todays largest PE firms buy and manage the business to produce a return.

Finding the right investors

While stage is typically how these are grouped, for founders, entrepreneurs and CEOs your businesses maturity and experience are actually the better indicator of which group you should be talking to. While immature companies may be wasting their time and distracting themselves from their core mission by even seeking funding, it is an even tougher climb when you are talking to the wrong type of investment group.

If you are a first time CEO or entrepreneur and have never raised capital before you must likely should be talking exclusively to Angel investors. VCs and Private Equity will likely only be deal hunting.

Angel investors are more likely to provide guidance. They are also more likely willing to take the risk. One thing that stops a lot of founders from taking the Angel route more seriously is that Angel investors know they are taking a bigger risk, they often want a larger stake than you may be advised to give. What many business advisers will recommend early entrepreneurs do is seek convertible investments so you can minimize your equity give. This is great advice, but it must be balanced against the likelihood a less experience CEO will be able to raise a funding round. Taking a measured equity hit early on to create a beachhead investor can get you an advocate who is invested in your results. It also will give you a jump start on building the business maturity necessary to attract a full funding round in the future.

If you have experience as a CEO or entrepreneur with a track record of success or have built a relatively mature business (multi MM with a pro forma to illustrate it) then you likely skip the Angel phase and talk to VCs.

If you have a mid-market (10MM+) or larger company and are thinking about large scale growth you should talk to VC investment firms or PE. If you are thinking about exit, PE firms may be a route to consider. PE firms will buy out owners and let them continue to manage in some instances, other times they will buy the company outright, combining it with existing firms in their portfolio or placing an all new management team.

(c) 2022 Vaxa Factor