Find Out the Different Categories of Capital and Investors!

If you are an entrepreneur who is starting up a company, you probably heard about venture capital and investors.   Knowing what kind of investors there are to contact and how capital is categorized is very important when raising capital for your company.

Debt Capital

The first kind of capital is debt capital.  Debt capital is capital that is lent to you from a bank or an investment bank.  With debt capital, the investor makes a percentage from the capital he lent you.  Think of debt capital as taking out a loan from the bank, but on a large scale.   Debt capital is kind of like taking a mortgage out on your house.  It works on the same principle.   When you pay a mortgage on your home or pay the monthly payments on a loan from a bank, you are paying a certain percent of interest which you agree on when making the loan.  Debt capital works the same way.  In most cases, when you get debt capital for your business, your investor makes at least ten percent on the debt capital.  As far as the investor is concerned, debt capital is low risk capital, because he is guaranteed that the company will be paying him back and most investment firms which deal with debt capital make sure they invest in companies who are capable to pay them the debt capital back with the agreed upon interest and on the agreed upon time.

Equity Capital

Equity capital is different from debt capital in that with equity capital, you do not pay any sum of money back to the investor, but investors do have conditions when investing equity capital into a company, such as having a certain percentage of a company stock or a seat on the company’s board of directors.   The one drawback with equity capital is that the company, which has received equity capital will need to be primed to be eventually bought by another company in a process known as liquidation or be set for initial public offering (IPO).   There are two different kinds of equity capital, private equity and venture capital.

Private Equity and Venture Capital

Equity capital is actually placed in two different categories, which are private equity and venture capital.  Private equity is capital that is in privately owned funds and is invested into companies who show promise in their respective markets.   Private equity funds can be either pension or retirement funds or other private funds from privately owned companies.   Venture capital, on the other hand, is a subset of private equity and is usually used to invest in early stage companies which are poised for high growth.

Investors

Investors are people who invest in different companies.  There are many different kind of investors ranging from angel investors, venture capitalists, institutional investors.  A bank or an investment firm that invests debt capital can also be classified as an investor.

Angel Investors

Angel investors are also known as private investors and are usually private wealthy individuals who have already gained their large sums of money and invest in companies for all kinds of different reasons.  The main difference between angel investors and other investors is that angel investors invest their own money and rarely ask for a stock in a company or a seat on the board of directors of a company in which they invest.   An angel investor could simply be investing in a particular company because he simply likes that particular entrepreneur and wants to help him out.  Other angel investors might invest in companies who have a cause that falls in line with that particular angel’s morals or ethics.  What ever the reason why and where angel investors invest their money is a mystery, because angel investors do not need to answer to anyone for their investments as do institutional investors or venture capitalists.

Venture Capitalists and Other Investors

Venture capitalists and institutional investors are different from angel investors, because they are investing other people’s money and not their own.   An institutional investor is an investor who invests for a private equity firm or other private investment firm.  Institutional investors can invest either equity or debt capital in companies, depending on the investment firm he works for.   A venture capitalist, on the other hand works for a venture capital firm and solely invests venture capital to early stage companies.  A venture capitalist or an institutional investor who works for either a vc firm or a private equity firm will usually request a seat on a company’s board of directors or a share in the company’s profits as a condition of the investment.

How Do Investment Firms Get Their Money?

Depending on the given investment firm, there are different sources for an investment firm’s funds.   In the case of private equity and vc firms, their fund is primarily equity, which is moneys that other companies hold and equity funds are usually managed by either private equity or venture capital firms.  These funds can be a company’s pension fund or a fund for other functions.   Successful venture capital and private equity firms usually generate new funds after successful investments.   Large companies may also have their own venture capital arms, such as Exxon or Intel, to invest in companies that have a product which could benefit those companies or pose serious competition to those companies if left independent.

Is There an Easy Way to Contact Investors?

In the past, there was a big problem for entrepreneurs to contact investors and find the right investor without going through a lot of red tape and running around.  Today, however, thanks to the internet, you can find the right investors if you have the right resources.   There are many companies that offer access to directories and databases which have large numbers of investment firms which you can access from your fingertips.   One of these databases that is used by some Fortune 500 companies is the VCgate Venture Capital Database, which you can find at www.vcgate.com