What is the difference between an angel investor, a VC and private equity?
Whose money they invest, at what stage, and what they need from the outcome — and that last point determines how they will behave toward your company.
Angel investor. An individual investing their own money, typically at the earliest stage — from a few thousand to a few hundred thousand pounds. Frequently former founders or operators, and frequently investing partly for involvement and interest rather than purely for return.
What follows: decisions are fast, made by one person, and can be based on conviction about you rather than metrics. There is no fund whose returns must be justified to anyone, so an angel can be content with a modest outcome. Angels invest alongside others in syndicates or through platforms, and may be seeking tax reliefs such as SEIS and EIS in the UK, which materially changes their risk position.
Venture capital. A firm investing a fund raised from institutions, pension funds and wealthy individuals — the limited partners. Invests in growth-stage companies, generally taking a minority stake, and takes board seats.
The fund model determines the behaviour, and this is the part founders most need to understand. VC funds operate on a power law: most investments fail or return little, and the fund's return depends on a small number of very large successes. A fund must therefore back companies that could return the whole fund. A business that would comfortably become a profitable £10m-revenue company is a poor fit — not because it is a bad business, but because it cannot produce the outcome the fund requires. This is also why VCs push for aggressive growth: a modest outcome is, for them, close to a failure.
Funds have a fixed life, usually around ten years, which creates pressure toward an exit on a timetable.
Private equity. Invests in established, profitable businesses, usually taking a majority or complete stake, frequently using debt — a leveraged buyout. Focuses on operational improvement, consolidation and cash generation, then sells after several years.
Other sources: grants, revenue-based finance, venture debt, and customers.
General information, not financial advice.