Angel investors and private equity are equally effective in investing funds into companies. They share the same overall goal of investing in a company with the hope of the business becoming successful, but their methods for doing this are very different.
An angel investor is a single or group of investors that use their own money to invest in your startup company. Angel investors traditionally offer mentoring services to help a startup become successful. A private equity investor is a group that borrows the money you need from multiple investors and helps your business become successful.
If you have your business plan set, but you’re unsure of where to get investors, stick around, this article is for you. Or, maybe you have already started your business, you are just looking to take it to the next level, this article is for you, too. Keep reading to learn all about the difference between angel investors and private equity.
Angel Investors vs. Private Equity
If you are a new or newer company, you may not have the capital to grow your business to its full potential. By bringing in an investor, you can bring in the capital that you need to build your dream without having to front the money to start. Some investors will also bring experience and connections to help you get where you want to go.
You want to be careful though not all investors are going to be a good thing. Some investors will take a stake in your company and also control a large portion of it. Some will supply the capital only and leave you to run the business still.
You also want to watch payments, some investors you will have to pay back, and the amount will be based more on where the company is at the time of payment and not where it was when you first got the funding. There are also some that you do not need to pay back, but they take a percentage of your profits for a set amount of time.
What Is an Angel Investor?
An angel investor is precisely what it says if you are a startup company. Angel investors are usually retired, entrepreneurs, or executives. Even though they are retired, they still want to keep growing their networks while staying in the know on business development.
They have the resources and ability to serve as mentors to new startup companies and provide the resources they may not have had access to without them. Have you ever watched “Shark Tank”?
The people come on the show and present their business and provide the details of everything to investors that are there. The investors then make an offer if they are interested in investing in their company.
For example, an angel investor might propose giving $100,000 and market the business and package the product for 25% of the profits over two years.
These are a type of angel investor. They are providing the capital and also offering to mentor them and show them how to run a successful business. They are giving them what they and also providing them with valuable information, resources, and connections.
Who Should Turn to an Angel Investor?
Angel investors are great for some business ventures, but not ideal for others. If you’re one of these, then an angel investor is a good fit for you:
- A small scale company or individual entrepreneur
- Someone that’s in the very beginning phases of building their brand, or a startup company
- An individual with a clear cut business plan, and numbers to back it up
What Types of Angel Investors Are There?
There are different types of angel investors. Each kind of angel investor has their area of expertise, whether it is investing more considerable funds, or maybe even investing in many smaller companies.
Here are the different types of angel investors, what they do, and the pros and cons of each. \
|Super Angel||They make a large number of investments.||They have an extensive network that can be accessed for connections and help||Their time is spread thin, so you may not get the expertise to make the most of your business.|
|Domain Angel||Specialize in a specific type of investment, gaining expertise there.||Industry expert making them valuable for advice and gaining connections||May give unwanted advice due to their knowledge of the industry.|
|Previous Colleague Angel||Group or team that have worked together previously||Looks useful to other investors||Only financial value not in the way of advice|
|Friends & Family Angel||First, commit investors||Willing to give you the money||Only financial value not in the way of advice|
|Grouped Angels||Investors that are formally grouped together||A single pitch gets to multiple investors||Can be harder to get them to agree to the investment|
|Fellow Entrepreneur Angel||Entrepreneurs who back new entrepreneurs||Know new endeavors best and are willing to take a chance on a new venture||May not be able to provide much funding|
|True Believer Angel||Honestly believe in the startup and want to help||Great for encouragement and support||Hard to find and don’t have the critical eye to help you succeed|
|Financial Angel||Investing in building their portfolio||Do not tell you how to run your business||Focused on the financial returns and not providing advice|
|Sport Fisherman Angel||Invest in entertainment and show off the ability||Well connected||They are not interested in the business and will move on easily|
|Foolish Angel||Naive supporter||Do not care about money||May influence you in foolish ways|
What Are the Pros and Cons of Using an Angel Investor?
While an angel investor may seem like the answer to your prayers and the dream of finally owning your own business are finally within reach, you want to make sure this is the right path for you and your business.
Just like with everything, angel investors have their pros and cons and might not truly align with what you are trying to accomplish.
|Willing to take risks because:||They will set the bar higher:|
|The money is not a loan:||There are always strings attached:|
|Your odds of the business being successful are increased||You are not in full control of your company:|
How Do Start Working with An Angel Investor?
Getting an angel investor to work with you will not be an easy task to complete in your business plan, but with social media and networking in the right places, it is also not impossible to do.
There are some things you can do to help secure an angel investor that is the right fit for you and your company.
Decide What Your Ideal Angel Investor Looks Like
When you first started in the business, you heard that you need to create your ideal client avatar. Deciding on an angel investor, you will want to take the same approach, but you will be looking at different criteria this time.
Even still, with your ideal angel investor, you will need to know who they are so you know to find and engage with them. You are going to want to ask yourself questions like:
- What industries are they involved with? Do they work with and know a few industries, or do they specialize in a specific industry?
- How much money are you looking for them to invest in your company?
- How much are you willing to give up to get them to invest?
Join an Angel Network
Take a look at Facebook, and they have groups for anything that you can think of, and angel investors are no exception. You can also take a look at sites like AngelList or SeedInvest to find additional options for finding an angel investor.
Make sure you join a few different groups both nationwide, and you can even join more localized to you.
Once you have joined a group on Facebook or your social media platform of choice, you need to get in there and see what people are posting. After that, you’ll be able to see what people are talking about you will be able to start building relationships.
Just like when you started your company, you needed to get to know people and build the know, like, and trust factors that you need when forming any relationship, whether in business or personally.
By building relationships, people will start to know you and what you are about, making it easier for them to believe in your business and then invest and help you to grow your business.
Check Out Local Angel Groups That Are Not Online
Some old fashioned networking is often the most successful method of finding an angel investor. Finding a local group can add a more personal approach to meeting the angel investor that you really might work well with and also will have less competition for funding.
When you find a local group or even a couple of local groups, you can go to their gatherings and work on building those relationships to find an angel investor to work with you.
What Is A Private Equity?
Private equity will raise funds from individuals and groups that have a high net worth. Groups that they may approach include but are not limited to pension funds, insurance companies, and endowments.
After they have raised funds, they will invest the funds throughout different industries. Private equity investors do tend to become majority stakeholders in the companies they invest in and can put their people into management positions and on the board to work towards increasing their return on investment.
Who Should Use Private Equity Investors
Private equity firms invest in just about any kind of business because there are a few different kinds of private equity funds. Whether it’s a new startup company that needs the funding to get off the ground, or an existing business that needs a revamp, private equity investors can help.
What Types of Private Equity Funds Are There?
Unlike angel investors, private equity funds tend to fall into two categories. There is the venture capital or the buyout or leveraged buyout.
Venture capital is funds that are pooled together to invest in small, early-stage, and new businesses that they see the potential for massive growth but have limited access to capital due to their current place in their business.
The possibility of seeing large returns if very attractive to potential investors even though the risks are also high.
Buyout or Leveraged Buyout
These are generally used for businesses that have been around for a longer time and need some help financially to grow.
Leveraged buyouts will become a controlling interest in the company and use leverage to work towards a greater rate of return and are generally larger than venture capital funds.
What Are the Pros And Cons of Turning to a Private Equity Firm?
|They have large amounts of funding available. They can do deals that go into the millions since they have raised the money from multiple sources||Private equity firms usually take a majority stake in your company. You will be giving up control of your company, but the amount they invest can be more significant.|
|They are very involved in your company. Their main goal is to increase profit so they will look at every aspect of your company to increase its value.||Private equity firms and business owners define the value of a company very differently.|
|Since they will have to pay back investors the money they borrowed plus show a profit for the investors and themselves, they have a big incentive to see your company succeed.||Eligibility is more narrowed|
They are looking for precise criteria to be met:
|The chance of seeing higher returns are more significant. According to a study conducted by Boson Consulting Group in 2012, two-thirds of these kinds of deals showed a 20% growth.|
How to Work With Private Equity Firms
When you decide to go the private equity route to get funding into your business, you want to keep in mind that you are working towards the end game.
What will you do in 5 years when it is time to take control of your company back.
How To Find A Private Equity Firm
In general private equity firms are actively looking for companies to invest in. They have a profile that they are looking for and will reach out when they find companies that fit within those parameters.
If you find yourself needing to find a firm to work with and you have not been contacted by one, you can still pitch your company to them. Just like with the angel investors, there are groups out there that are geared towards private equity investors.
How to do the Deal With A Private Equity Firm
Getting a deal done with a private equity firm is a lot more involved than other types of investors.
There are obvious steps that you will go through, and the better you are prepared, the odds of getting this done will be more significant:
- You must have a detailed business plan
- Why you need the funding
- How much money you will need
- What the private equity firm can expect to gain by investing
- What your five-year financial goals are and how you plan to see that that happens
After you present this information, if the firm chose to invest in your company, you will receive a memorandum outlining the broad guidelines.
Keep in mind this is just a starting point, and you will have the ability to negotiate the final terms still. You want to make sure you have experienced lawyers or a team to help you.
The private equity firm is very experienced in this part, giving them an advantage if you are not.
After you have finalized the terms, you will get an offer letter. When you accept the offer, you will need to be prepared to give the private equity firm a lot of information.
They will want full details of your business, and they will be picked apart by the private equity firm and outside consultants and accountants that they bring in.
If everything goes well in these checks, you will then sign the contract. It’s not uncommon for there to be a few things that need adjusting before the contract can be signed, so if this is the case, don’t get discouraged.
Working Towards the End Goal
Once everything is signed, it is time to get to work. Depending on the terms of the agreement, you will get started by doing things like being on your board and putting certain people in management positions. The main goal is to work towards the private equity firm exiting your company within the next five years.
What Are The Options At The End Of The Agreement
When you get to the end of your agreement, there are some common ways the private equity company can exit your company:
- Repurchase: A repurchase is when you buy back the private equity company’s stake. If everything were successful, this amount would be higher then it was when they bought it from you, but you would gain control of your company back.
- Secondary Sale: The private equity firm sells it to another private equity firm or financial investor. You still do not have control of your company, and now you are working with someone new.
- Trade Sale: Your business is sold to a competitor or other company. Meaning you would lose your company completely.
- IPO: Your company goes public, and the private equity firm sells its stake.
Becoming an Angel Investor vs. Private Equity
When trying to decide, there are some key factors you need to take into account before making your decision. By making a genuinely informed decision, you have a better chance of being successful in your investments.
Investing money is always a risk. However, if you have diversified your investments, the risk of a total loss is less.
- Angel Investing: angel investors have to make sure they have diversified their investments on their own by setting aside enough to invest in many companies.
- Private Equity: Because private equity funds invest in a lot of companies these are already diversified
- Angel Investing: It is tough to choose an investment since you don’t know how the business will turn out.
- Private Equity: Since there are many companies in each fund the risk is lower
How Involved You Want to Be
- Angel Investing: Angel investors are usually also mentors, so they are very involved in the business
- Private Equity: Private equity investors put people in place to help manage a business but are general hands-off themselves
What You Need to Become An Angel Investor
Before you can become a qualified angel investor, some criteria will need to be met:
- Have a net worth of $1 million or more not including your primary residence
- Have at least an income of $200,000 or more for the last two consecutive years
- Are a general partner, director or executive for the issuer of the securities funding the startup
However, under the JOBS Act, nonaccredited investors who have income below these levels can use crowdfunding platforms to practice angel funding.
Crowdfunding is a way to fund a venture by raising money from a large number of people and is usually done over the internet. Some examples of crowdfunding would be sites like Kickstarter, GoFundMe, LendingClub, and Indiegogo. There are four basic types of crowdfunding:
- Donation: individuals or companies give to a campaign
- Debt: individuals or companies loan to a campaign
- Rewards: individuals or companies get something for their donation
- Equity: individuals or companies are given a portion of the business for their donation
What You Need to Become A Private Equity Investor
The main thing you will need is education. It would be best if you had a bachelor’s degree in a major such as finance, accounting, or economics.
Most firms also want you to have 2 to 3 years of experience as an investment banking analyst. These firms are small, and competition to get the position is thought. To get an interview, you will need a strong network and know the gatekeepers (Firm headhunters).
If you are starting out or in the early stages of your business, still finding an investor is a direction you might want to consider. In the beginning phases of your business, you have a lot going on and having someone to help you with the money end but also with some of the strategies and helping you to build the right way.
When you have an investor like an angel investor, they usually have an entrepreneur background and know-how to build your business with you. Depending on where you are in your business, sometimes the knowledge you gain will be worth what you give up to get it.
If you are not new to the business, but you still need help to get to the next level, then the private equity investor might be the route you will want to go.
They often offer more extensive funding and will work with you to get the best returns on the investment.
Private equity investors also tend to follow a specific model or business type. If you happen to fall in one of these you may not have to look for one, they will reach out to you.
If you are thinking about becoming an investor, make sure you explore all of your options. You will need to know risks; depending on the investment, you will want to know what your exit options are and if you need to be accredited or education requirements.
Investing can be an excellent choice for creating extra income, but there are always risks that you will want to evaluate before you decide what you want to do.