Last week I was talking to an angel investor that had invested in a couple idea stage startups and he mentioned that he was also interested in small private equity deals. Curious, I probed deeper and asked what a small private equity deal looks like. He responded that it might be a startup with $500k in revenue. Hmm, I realized we were talking about different things. Here’s how I see it:
Angel Capital
- Idea stage through seed stage
- $0 – $1 million in revenue
- Not profitable
- Minority stake
- Insanely risky
- No debt component
Venture Capital
- Early stage through growth stage
- $1 million+ in revenue
- Not profitable
- Minority stake
- Very risky
- Moderate debt component
Private Equity
- Growth stage
- $20 million++ in revenue
- At least $5 million in profits
- Majority stake
- Moderately risky
- Heavy debt component
So, the gentleman I was talking to was really looking for angel deals where the company was in the seed stage instead of the idea stage. Angel capital, venture capital, and private equity are all very different and each serves its own purpose.
What else? What are some other differences between angel capital, venture capital, and private equity?
David Cummings on Startups 
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More of a generalization of the profile of your other partners, experience they have in different stage of a business lifecycle, and ultimately size of checks that they are writing. My preference is #NoVC!
why private equity can’t be with revenues of 500k?
Ok somebody needs to educate founders on finance. Let’s go through an example so I can explain how badly founders have been getting screwed by investors over the past few years as the entire “startup” finance community has become a bunch of risk-free lemmings.
Let’s assume you start a company. You have no product (technical risk), no revenue (financial risk) and no senior team with a proven record (operational/execution risk). You have an idea and you ask for money. Angels tell you no. So you find a friend and both of you start working on the project nights and weekends. You talk with customers and build a product, removing technical risk. You return to angels and ask for money and again the answer is “no”. So you work harder, signing up more customers, and now you’re doing $500K ARR. Before you return to the “angels”, let’s think about what you’ve done.
You removed technical risk with the product. Since you and your friend are working part time on this, $500K is a very healthy revenue number for 2 people – even if both of you were full time. So for $500K, you’ve got a bottom line profit (EBITDA) and thus removed financial risk. Proving that you were the right people to get the company going, you’ve also removed operational risk.
So what we effectively have here is a growth equity deal. Sure, the EBITDA is not “$5M”, but there is EBITDA! You’re a lower market growth equity deal. I know many angels that require > $50K MRR to be interested. In fact I remember Jeff Clavier asking his deals to be $100K in MRR at the seed stage. Two things happen as a consequence. 1) No hard problem is getting solved because you can’t convince 50 people to work on something for free for 3 years to get traction before an investor is interested. 2) By the time non-friend and family enters the fray, you don’t need them. You’ve removed risk to the point where you will likely have a larger personal exit if you keep boostrapping. Don’t believe me? Here’s some basic math:
If you look at successful startups that reach IPO in < 7 years you will notice that the CEO founder owns < 5%, sans celebrity founders like Dorsey at Square. If you IPO for $1B, this means a stake of $50M. If you don't make it to $B in < 7 years (which is the case for 99.999% of companies) and still take "venture" dollars, then your ownership will be < 1% (investors have clawbacks and ratchets that give them total downside protection that dilute founders to nothing… ask the OpenTable founders how much ownership they exited with when their IPO took 12 years). With our fictional $500K ARR startup, you can hire a few people and grow it to $3M over the next 3 years. Let's assume you get a 10X revenue multiple in an offer and sell the company for $30M. You will almost certainly exit with more money than the former case. Founders need to grow a backbone and tell investors to bugger off.
David thank you for your post and I will comment and bring in my contribution to your post, however first I wish to respond to Jordan Thaeler for his down to earth amazing, simple and detailed, almost dissected explanation. Thank you both
Jordan my most sincere thanks for your post.
It show that you care, and your deep profound knowledge about the subject of ‘Angel Capital V/S Venture Capital and Private Capital. I wish more people who have joined LinkedIn and taken the opportunity to become members of AMAZING LinkedIn take it more seriously and if they have joined take the time to read posts and offer comment just like you have Jordan. Members who have joined should pay attention and participate and really allocate quality time to read pots like your amazing post, learn from or teach other members.
Most times I just wake up earlier like today on Saturday I was up at 6 am just to connect with my LinkedIn business associates and Conjunction JV’s. I’m a Mandated Global Private Banker based in Hong Kong and Liechtenstein so my position is allowing me the opportunity to fund large projects or pleasure in rejecting some ‘pipe dreams’.
The moment I hear request “we need some mobilization funding first’ I run a mile away. Some projects are great BUT people the ‘Project Proponents’ who are cooking the idea, are wrong in so many aspects and ‘shades’ or they have the wrong intentions in just getting their next meal from the next victim.
Some ideas are great, but still in a nebular stage and regrettable some creators of the idea are also somewhere there in the nebular. I have no time to waste my priceless time to educate them for free on the needs for SWOT analysis and projections and balance sheet and the ‘bottom line’ or whatsoever so regrettable I just smile and walk away.