Equity fundraising: the difference between the various types of investors

Equity fundraising: the difference between the various types of investors

Equity fundraising is one of the key issues that any founder of a startup will have to face at least once in their life. Equity fundraising indicates the activity of obtaining economic resources from public or private entities, offering in exchange the risk capital (or equity to be precise) of the company, in order to finance a specific business project, and associated costs / investments.

We can distinguish five distinct categories of equity fundraising investors:

  1. Business incubators and accelerators;
  2. Business Angel;
  3. Venture Capital and Private Equity investment funds;
  4. Financial holding companies;
  5. Corporate

Business incubators and accelerators are organizations that help entrepreneurs set up their own startups (in the case of incubators), or make it grow faster than they would independently (in the case of accelerators). This is done through targeted courses, mentorship activities, training activities and, in some cases, investments or support for equity fundraising activities. Business incubators and accelerators can in fact operate by setting up their own investment fund and investing in the best companies incubated / accelerated by them. The latter are therefore found either in the very early stages of life or a little further on. On the other hand, a further model through which incubators and accelerators enter the risk capital of the target companies is linked to the offer of services: in exchange for these, the incubator / accelerator enters the cap table of the target company.

Business angels are individuals who, like “angels”, believe so much in a particular project that they invest their savings to become partners, and therefore participate in the profits and losses of the company being invested in. Usually, given the limited “spending power”, these invest in the early life stages of companies (pre-seed, seed), in order to allow them to collect the economic resources necessary to start operating or invest for growth of their business. Among these we can distinguish professional investors, who differ from other business angels (mainly relatives and friends) in the number of investment transactions carried out, the amount invested and the skills in business management they possess. Finally, business angels can also group themselves into associations, such as the Italian IBAN or Italian Angels for Growth and operate as a Venture Capital investment fund. This serves both to be able to achieve greater investment volumes than privately, thus managing to invest in rounds of more mature and less risky companies, and to have greater guarantees, represented by the selection of the most deserving projects by employees of the association and the possibility of being able to count on the association itself for any type of problem.

Another type of investor to be included in equity fundraising are Venture Capital funds. These are investment funds that invest in startups and SMEs with innovative projects. Usually, they are interested in companies that have already found the market’s interest in the product or service they offer, therefore already with a certain volume of revenues behind them, the minimum threshold of which varies from fund to fund. The target companies, therefore, are in a phase immediately following that of the companies in which Business Angels usually invest. Unlike the latter, then, Venture Capital (or VC) invest sums usually collected by public entities, such as banking foundations, insurance companies or social security institutions. Once the pre-established sum has been collected, the VC undertakes to reinvest the funds obtained on the basis of previously established criteria, concerning for example the reference sector, the degree of maturity, or the geographical area in which the potential target companies operate, trying to generate the best possible income for those who financed the fund itself. VCs, then, have an average exit (or divestment) horizon of five years. The same logic is followed by Private Equity funds, with the only difference that they are interested in more mature and larger companies, with turnover in the order of tens of millions of euros.

Financial holding companies are financial companies that hold shares or stakes in subsidiaries over which they carry out management and control activities. Unlike investment funds, they can raise the sums to invest even from small private investors, always with the aim of maximizing their return by investing, among others, in companies with innovative projects. As in funds, the investment criteria are set a priori, and the maturity, sector and size of the target companies vary for each holding. A particular type of financial holding company are family offices. Family offices are service companies that manage the assets of one or more wealthy families. The other activities they carry out certainly include the management of investments in the risk capital of target companies. Not infrequently, in fact, they are also interested in shareholdings or stakes in startups or SMEs with innovative projects, with the aim of making the capital of the families served as much as possible. The investment criteria vary according to the needs of each individual family office, it being understood that the target companies must have already widely recognized the market interest in the product / service they offer, including through the turnover volumes.

At the end of the panorama of equity fundraising investors, there are corporates. These may in turn be interested in investing in startups to innovate a branch or even the entire company, by offering a new product / service or process that is in some way better than what was previously offered. These corporations, although they may have both the economic resources and the skills to innovate the company internally, prefer to rely on startups, to minimize risks: once the trend of their reference market has been identified, the corporates invest in the most representative startups of the trend itself, without risking firsthand in “ex novo” projects, which are very expensive both in terms of time and money. Unlike Venture Capital and Private Equity funds, and financial holding companies, the investment criteria are not set a priori, but the investment, as mentioned, is based on market trends, as well as the sums to invest. However, the situation of Corporate Venture Capital funds is different: these are Venture Capital investment funds created internally and managed by the corporate itself, with the aim of investing in innovative projects in the reference sector. In this case, the investment criteria are set in advance.

If you want to learn more about the topic, or if you are interested in equity fundraising for your company, do not hesitate to contact us. One of our experts will be able to help you.

The BizPlace team

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