"Private equity, in finance, is an asset class consisting of equity securities in operating companies that are not publicly traded on a stock exchange ... Capital for private equity is raised primarily from institutional investors."
Therefore, anyone who professionally invests money into private companies is in the Private Equity business. If it is in the early stages of a company, it is called Venture Capital.
The VC Formula
When I got into VC as an intern and then an analyst at Redpoint Ventures, I sat on a 50 minute flight from SF to LA with a principal at a VC fund. I think we had 3 beers on the flight (sweet drink tickets) and I walked away with a better idea of what VCs really do and 2 sheets of marked up scrap paper that I still have today. Who needs an MBA when you’ve got time to kill on Southwest?
Basically, VC’s are money managers. They are just like your guy at Merrill Lynch who is telling you to diversify your portfolio to decrease risk. They want to support entrepreneurs but in the end their main goal is to provide their investors with the best return possible. Some people like to think that working in VC is about taking big risks. In reality, it is about managing risk.
First let’s take a look at the traditional fund types and the levels of risk that they prefer.
2. B Round
3. Late Stage/Growth
2. B round
3. Late Stage/Growth
4. Angels and everybody else - We can get to this later.
Now the job of these funds to look at the 4 main types of risk. Some investors say they focus on team, while others focus on market size, or their own thesis, but whatever they tell you, they definitely look at these 4. They are slightly different than the 4 Mark Suster recently posted.
1. Team/Management risk
3. Technical Risk
4. Financial Risk
After you look at risk, most investing is about instincts. Do I like this guy? Do I want to be a business partner with him for 7 years? Do you think he is tough enough to make it? Is he also humble enough to take a step back if he is not performing and an new CEO needs to step in? Is this a market that you are passionate about and want to learn more about? If you lost all your money but learned a ton about that market that would help you in future investments, would it be worth it? Do you like the co-investors? Will this investment strengthen your relationship with them and produce a source of high quality deal flow?
The best returns (and the way I’d prefer to invest) will come from people who invest in very early stage high risk/return deals. Since I don’t have the cash to swing for the fences on every deal, I also make smaller bets where I believe that the risk is low enough that I won’t lose everything.
I’ve started to make a few angel investments. So what do I look for?
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