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The library of essays of Proakatemia

Startup Investing



Kirjoittanut: Miika Hautamäki - tiimistä Ei tiimiä.

Esseen tyyppi: Yksilöessee / 2 esseepistettä.
Esseen arvioitu lukuaika on 4 minuuttia.

Startup Investing  

 

Startup companies are usually seeking for funding in the beginning of their journey, and this is often done by seeking angel investors or investments from private equity firms. But after all these are not the only ways of seeking for funding. Upcoming startup companies can also list their company on different kinds of investment lists or take part in different kinds of startup competitions where there is always investment companies on the look out for their next investment. All these types of ways to seek funding differ from each other and I’m going to tell you how.  (Titan 2022.) 

 

Angel investors 

Angel investors are usually one of the first ones to invest in to the startups in the beginning. Most of the time the angel investors are not investing because of the company but they are investing because of the idea that the company might have and the potential of the growth that the company might gain in the future. This is a way for the angel investors to diversify their investment portfolios, so their portfolio is not concentrated only in stocks and bonds of other companies. In some cases these angel investors can get together with other angel investors or venture capitalists and invest together, if they don’t want to invest completely out of their own pocket. Angel investing gives investors also the ability to buy the company’s stock at a later time with a  discount, this is because the investors are usually buying a stake of the company in the form of equity or they give the company convertible debt which gives the discount in the shares at a later time.  (Titan 2022.) 

Angel investing is considered to be extremely risky, but the investors are always looking for that one hit investment which succeeds in a sizable financial payoff. In the end all of the investors are aware of the fact that not every investment is going to be a hit and a big source of money. Why take the risk then? In a recent text a know angel investor Adam Nash wrote that in 23 of angel investments that he made between 2012 and 2014, they had an Internal return rate (IRR) of 48.6% and the value of the cash that he had invested was 21.2x as of May 2022. So this shows that even though the risk is really high in these types of investments, if you can calculate the risks and also make the right investments. You can be able to make a big amount of money in just a few years, while still having the space for a couple of mistakes and not so good investments. (Titan 2022.) 

 

 

 

 

Private equity 

 

Private equity also known as private investing, is style of investing where private equity firms invest into different companies that are going trough financial difficulties, restructure them to make them more profitable and then sell them later with a profit. These private equity investing firms invest in a wide range of companies all the way from healthcare companies to local newspapers. (Titan 2022.) 

Most of the time private equity firms invest so much to the company that they hold the majority of of the shares and in the same time control the key aspects like cutting jobs, replacing executive officers and trimming costs by reducing employee benefits. But there is also situations when private equity firms just a buy a minor stake from the company and just look for profits. Some private equity firms have a different arm for venture capital where they are looking for financing and scaling up potential start ups that are starting their business. (Titan 2022.) 

Private equity investing is known to be more riskier than the usual investing like when you are investing to S&P 500 which is an index for the biggest publicly traded companies in the USA, but it is still safer than angel investing. Ultimately the purpose behind private equity investment firms and private equity investing in general is to earn profit from the investments with a low risk in them. It is sometimes also argued that private equity firms run the world because they hold so much equity in them and therefore also hold so much of the money that is in this world. For example, Blakcstone group that has 951 billion under their management. This gives them the ability to shake the stock market in any way they want and also lead the stock market to the way they want to. This is why a lot of people are scared for the leverage that these private equity firms have.  (Titan 2022.) 

 

 

Conclusion

To conclude, while both investors are looking for high returns and are comfortable with the risk that they are taking. The investments are made in different types of situations when talking about the time when they are investing. Angel investors are looking to invest right in the beginning of the company’s journey sometimes before the company is even existing when private equity investors look to invest in already existing mature companies that they can distress, restructure and then sell at a higher price. The size of the investments also differ in these two investment types, angel investors are usually looking for investments that go from tens of thousands to millions, when the private equity investments usually go from millions to even billions. Both of these investments are also seen and known to be pretty risky investments, but angel investments are the higher risk ones since the investments are made in the very beginning of a startup and most of the startups end up going to bankruptcy within a couple of years, and when doing the private equity investing you have all the numbers of how the company has been running and that way can analyse your investment. (Titan 2022.) 

 

 

 

 

 

Sources: 

Titan. 2022. Angel Investing vs. Private Equity. Read on 8.3.2023

 www.titan.com/articles/angel-investing-vs-private-equity. 

 

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