Just back from giving a business plan workshop to a group of MBA students, many of whom were keen to start their own business. So naturally the subject of how to fund a business came up.
One of the areas that regularly seems to cause confusion with the students is the difference between Private Equity, Business Angels and Venture Capital.
At first glance they may all look the same. But there are differences and which you use varies with situation.
Firstly let’s clear up the term Private Equity. Although it’s a generic name for having a company owned by a person or group of people where the shares are not in the public domain (ie not on the stock market). Private Equity in investment terms tends to mean those large investment companies that buy up the majority of shares in a significant sized established business.
Most entrepreneurs will be more interested in Business Angels and Venture Capital companies where they both invest in younger businesses and don’t generally take the majority of shares.
The main difference between these is that Venture Capital firms are investing money gathered from other people who have bought into a Venture Capital fund. Whereas Business Angels are investing their own money.
This is an important difference because it means that Venture Capital firms have to invest in less risky opportunities. Hardly ever do they invest in start-ups, preferring to be involved after the business has proved itself and is ready for high growth. To cover their overheads these also tend to be larger opportunities.
Since Business Angel investors are using their own money, they will be prepared to take slightly more risk, start-ups and early stage companies are more suited to these individual investors. Occasionally in order to share risk or to be involved in larger deals Business Angels will form a consortium, generally headed by a lead investor.
Business Angel Investor’s names and contacts are not in a “yellow pages” of investors, otherwise they would have people camping on their doorsteps, never mind the security issues, they tend to use intermediaries to act as gatekeepers and screens.
Some of these intermediaries are expensive to use, which is why Company Partners set itself up as a “members site”. For a small monthly membership you have access to a full database of Business Angels.