What’s the difference between Angel Investing, Venture Capital and Private Equity?

Every startup and entrepreneur has one common need: cash. Because startups are often too small to raise money in public markets (hence, they are private and not public companies), this is where angel investors, venture capital firms and private equity firms come in!

Angels (short for angel investors) are usually successful entrepreneurs who not only want to cash in or invest in a promising, early stage startup, but also want to serve as mentors and guide new entrepreneurs and their companies. Some of the most popular sectors that angels are investing in are software, media, healthcare, biotechnology, and financial services.

While venture capital firms invest startups just like angels do, they typically invest in higher risk “ventures” who have already found their initial seed investment. Venture capitalists typically cash in on startups, that they believe will disrupt the existing market and generate huge returns on the initial investment. Because these investments are so fruitful, this is why venture capital firms are willing to take such big risks in the hopes that even just one of their investments will pay off tremendous dividends. Some of the popular areas venture capital firms invest in are those that can disrupt the existing high technology, consumer and business (enterprise) products, manufacturing and health care markets.

Private equity firms typically invest, or even use what is known as a leveraged buyout, to guide the growth of late stage companies that have proven their success in the existing markets. They look for big companies who are looking to expand further or companies who have experienced some sort of decrease in optimization in performance. In a leveraged buyout, a private equity firm will even use its own stake in the company as well as cash debt to acquire a company with stable cash flows and optimize the company’s performance. From these optimizations and tweaks, private equity firms are heavily involved in the day to day operations of the companies they work with and hope to see profits from their added optimizations.