Prof. Anand S
As more and more businesses take root in India, domestic and foreign financiers are scouting for good opportunities to invest their money. In newspapers and magazines, television shows and podcasts, we hear terms like angel investors, venture capital firms, and private equity firms. Don't they all put in money with the expectation of a handsome return? Yes, they do. But they operate differently and serve different purposes from the perspective of firms that need capital.
Angel investors invest on the merit of an idea and take a share of ownership inequity in a startup company. They could be business people or people from other professions and get involved in the early stage of a company, such as when only the idea exists. They could also plough in funds when the business is already up and running.
We commonly see them pitching in with funds after the initial funding is in place but before the venture capital firms are interested in partnering a business. They usually don't take more than a 25% stake in a firm.
Although Venture capital firms also invest in companies in exchange for equity, there are differences between them and angel investors. A majority of VCs would like to see a proof of concept of the idea on which the promoters set up a business. They offer to fund startups or other young companies that show potential for long-term growth.
<aside> 💼 Angel investors are private investors who put in their money, whereas Venture capital firms are professional investors who predominantly use other people's money. Angel investors do not get involved in the development of the company. In contrast, venture capital firms almost always take a board seat and get involved at an operational level.
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A PE firm invests when a company generates revenue, has profit margins, receives a stable cash flow and repays a significant debt. Late-stage investors typically invest larger amounts than the other investors (Venture Capitalists and Angel Investors). They invest in an entity that is not publicly listed or traded. Large institutional investors dominate this class of investors because of the need for substantial capital. They mostly buy 100% ownership of the companies in which they invest.
<aside> 💸 Both PE and VC investors invest in companies and exit by offloading their investments through Initial Public Offerings.
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Angel Investors take the highest risk
PE firms carry the lowest risk as they take a significant stake in established companies
VC firms carry a much lower risk than Angel Investors as they diversify their investments across a portfolio of companies