Capital Raising 101: Seed, Venture Capital and Private Equity

Are you a startup business trying to raise capital and completely baffled by the terminologies and processes?

It is invaluable to understand the full picture so that you know exactly what the expectations are and what the end-game should be.

The truth is, there are several variations of definitions for the breakdown of stages below in relation to capital raising for a startup. The most crucial thing is that a mutual understanding between the investor(s) and the startup is established. 

Startup Capital Raising Stages

1. Pre-seed stage – Bootstrapping (A few hundred to a few thousand dollars, normally from friends / family, generally speaking no equity)
2. Seed Stage – Seed Funding & Angel Investments (so many thousands to a million or two)
3. Early Stage – Series A ($2M~ – $15M~)
4. Growth Stage – Series B ($10M~+)
5. Scale / Expansion Stage – Series C (Millions to 10’s of Millions)
6. Bridging / Pre-IPO Push – Series D / Series E (Varies)

It is important to note that:

• Not all startup businesses will go through every stage.
• Amounts invested vary, although the dollar value generally trends up, the later the stage.
• Broadly speaking the investors are grouped into Seed Investors (Angels) and Venture Capitalists or VC firms. Angels normally appear in categories 1, 2, and at times category 3 whilst VC’s are generally categories 3,4,5,6; overlaps between Angels and VC’s are becoming increasingly common.
• Some define Venture Capital as an over-arching terminology encapsulating all stages including the Seed Stages.
• Generally speaking Angels are often individuals with invested personal wealth whilst VC’s are often pooled funds with more strict governance and criteria.

Still confused? We can further simplify the above into three stages:

• Early Venture – known as Seed (Categories 1,2)
• Series A – the transition from Seed into proper VC (somewhere between categories 2,3)
• Growth (B,C,D,E, etc…) – for specific milestones and expansion initiatives (Categories 4,5,6)

At the end of the day all these names and stage conventions are just shortcut indicators of a mutual understanding of what the investors and businesses are looking for. The most important thing above all else is ensuring that each venture achieves the optimal outcome of:

The whole is more than the sum of its parts. 

What about Private Equity?

Private Equity (often referred to as PE) firms are mainly interested in buying mature and established companies, that are often private. If the company is publicly listed, the PE firms may still take ownership of the company often with an intention of delisting it from the stock exchange. Private Equity firms often look for companies that have a stable revenue stream and are doing well, have has somewhat peaked due to circumstantial factors which may benefit from new management or process optimisation.

Differences between Venture Capital and Private Equity

• Venture Capital is normally a riskier investment compared to Private Equity due to investing in startup companies during their growth phase v.s. mature companies with tested and proven revenue streams.
• Venture Capital firms are often invested in a larger number of companies whilst Private Equity firms concentrate on only a few.
• The dollar amount invested; Private Equity often a lot bigger due to the maturity of the company they are buying out ($100M+), whilst the majority of VC’s are investing in smaller amounts.
• The ownership / equity of VC’s are generally at / not exceeding 50% whilst PE are often a 100% ownership buy-out.

Due to the similarities of documentation and deal structure, there is a lot of confusion amongst entrepreneurs when it comes to the topic of PE and VC. This is understandable especially in recent years as some Private Equity firms have ventured into growth-stage equity and conversely VC’s have also taken on a lot more of late-stage investments.

Take-away: Amongst all the confusion out there around the different stages of funding for businesses / companies, always strive for mutual understanding and never solely rely on terminology. In recent times there has been an increasing amount of overlap between Angels, VCs and PE. Whilst clear distinctions still exist, there are always exceptions to the rule and it pays to be absolutely clear especially when such an important venture is at stake.

Do you have a different terminology or definition of the above? Leave a comment and let’s discuss!