The Spectrum of Business Financiers
There are numerous types of business investors and a multitude of names by which they are coined; angel, seed, start-up, venture capital, private equity, mezzanine, leveraged buyout, management buyout, public companies, etc.
Investors are usually more active within a certain bandwidth corresponding to the growth cycle of a company from birth to maturity. A simplistic view is to divide investors into the following main categories, which coincide with the phases of a company’s maturing process:
- Angel – founding
- Venture Capital – early stage
- Private Equity – growth phase
- Mezzanine – growth/maturing
- Public – mature
Angel investors are typically high net worth individuals who back entrepreneurs who are founding companies. Together with venture capital firms, they typically provide the earliest stage of investment to a company. This capital is often referred to as “seed capital”.
Venture capital firms generally operate from a pool of money that has been raised to invest in early-stage companies, but may also be backed by a particular individual or family. Like angel investors, venture capital firms tend to invest in the early phases of a company’s life-cycle.
Private equity firms almost always operate from an invested pool of money. The initial investment capital may come from a variety of sources; high net worth families, wealthy individuals, pension funds, trusts, endowments, etc. While there are always exceptions to the rule, private equity investors typically invest in companies that have matured beyond the proof-of-concept phase, where there is a definable market position, a solid revenue base and sustained, positive cash flow, yet still plenty of room for growth and expansion. Private equity firms often support leveraged buyouts and management buyout transactions.
Family offices most often act like private equity firms (or sometimes like a venture capital firm). The main difference between a family office and a private equity firm is that a family office invests from its own pool of capital (not a raised fund). As such, family offices are not constrained by needing to exit their investments within the typical 3 – 7 years like a private equity firm, (who must return capital to its limited partners).
Mezzanine investors provide subordinated debt to a company (subordinated to more senior debt). Hence, the name mezzanine, which would imply a second level. While angel investors, VC’s and private equity groups normally make equity investments, mezzanine firms make junior debt investments into growth companies, normally with a convertible clause. The convertible allows the mezzanine firm to convert the debt to equity, should the company have a great success. Mezzanine debt is usually sought to finance a company’s growth or working capital needs. Because mezzanine funds provide debt, which must be paid back, with interest, mezzanine investors typically only look to invest in companies with solid historical cash flows with proven ability to service the debt payments.
Public companies are a small fraction of the total number of companies in business, but represent a large portion of the corporate news. Public companies raise money from public investors through an IPO (initial public offering) or by issuing new shares (if the company is already publicly-traded). For the most part, publicly-traded companies are more mature and established, with significant historical operating performance. Because the SEC mandates a certain level of financial disclosures for public companies, there is much more transparency and visibility into the financial performance of public companies compared to private companies.
Of these types of investors, the www.privateequityinfo.com research database focuses on private equity firms, mezzanine investors and public companies. We therefore exclude angel investors and most venture capital firms from the database except in the cases where the distinction is blurred by firms operating across the investment spectrum.