Companies need capital at different stages in order to grow and create growth and jobs. Capital can be supplied in various ways, for example through bank loans or venture capital. Depending on what stage the company is in, various forms of financing are available.
Under the concept of venture capital or private equity, a number of different forms of funding and players are included. Private equity means investing in unlisted companies outside the stock market, but this can be done through different types of investors that differ in several respects. The following briefly describes three different types of Private equity.
A business angel is a private individual who invests capital in unlisted companies. The business angel is usually a person with experience and knowledge of entrepreneurship through providing capital, expertise, commitment and their network to help companies develop.
Business angels serve as a complement to formal venture capital as they usually enter into earlier stages of business growth phases than venture capital investors. Private investors can usually make faster investment decisions because they alone are responsible for their own money and invest substantially lower amounts than venture capital companies while they involve themselves personally in the company.
Focus is usually on business angels for growth in the early stages. This usually plays out as simple contracts and less formalised investment processes. Financial gain is the main reason for investments, but many studies suggest that business angels also have many other motivations.
Venture capital companies
Invest money in relatively early stages of a company’s development, as the company goes from a development phase to starting or further expanding sales. Venture capital companies are professional investors, with the aim of achieving a good return for their owners and financiers.
Venture capital companies usually work with fund investors’ money and usually take a 20-40% stake. The focus is on start-up companies and companies in some form of expansion phase. Venture capital companies are run by a management team that usually also actively works with the companies they invest in. Formal due diligence is conducted and comprehensive agreements are required in the investment phase.
Invest in mature companies that have development potential and stable cash flows but have need for an active owner with financial muscle. Buyout companies are trying to create value in their investments by being proactive in industrial conversion or focusing processes. Examples of conversion processes could be that the company has the need to make additional acquisitions or dispose of an unprofitable part of the company.
Buyout companies often take a leading formal role in the company and actively work with a large network of experienced industrialists. Buyout companies set clear financial and operational objectives, focus operations and clarify the company’s strategy to create value. Formal due diligence is conducted and usually key people are more closely linked to the company.