What is private equity?

- So all you know is that you need money for your company. I have founders coming to me at the earliest stages of their companies asking what type of financing they should consider. You can go debt or equity, friends or family, angel or venture capitalists. There are many routes available today. So let's talk about what's best for your company. There are two major types of funding, traditional financing and private equity. Traditional lending includes things like small business loans and peer-to-peer lending. Private equity means acquiring funds in exchange for some amount of equity in your company. So basically, traditional financing is like a loan, and private equity is trading equity for capital. With private equity, an investor is taking a high risk on your company with the idea they might receive a larger return on your exit. You're not returning the capital throughout the lifetime of your company as you would with traditional financing. You'll hear words like venture capital, angel investors, and seed investment. These are all kinds of terms people use when talking about private equity. For the purposes of this lesson, we'll talk in terms of early-stage funding. After all, you are here to learn about pitching your first investor. Generally, we see the ladder of early-stage funding progress like this. And just remember, there's no perfect path here. As the industry has evolved, we see plenty of variations, everything from micro seeds replacing bootstrapping to taking funds from friends and family. Bootstrapping uses your team's own capital to start and build the earliest product. Friends and family funding taps into your network to acquire early-stage capital. Angel investors can bring both capital and expertise to the table in early-stage funding. Angel investors typically invest their own money and write smaller check amounts than VCs, but you're most likely to have numerous angel investors involved. VCs can invest anywhere from early-stage funding to late-stage funding. We generally see one lead VC who sets the terms of the funding round and a few other VCs filling out a round. Venture firms vary from size to industry focus, which means that the check sizes can vary a lot too. Now that you've a better understanding of early-stage private equity, you just start to assess if your company should be venture funded. The majority of companies are not venture-backable companies. No, really. Venture funding is not the only way to success. So knowing this upfront will save you a lot of headache. In short, venture capital works well when your business is immature. This should not be confused with lifestyle businesses and mom and pop businesses. Venture is for young companies that have the potential to be worth hundreds of millions of dollars. So ask yourself a couple of questions. Are you building a company that has a potential to be a fast-growing scalable business? You have to be very, very honest with yourself here. Is your cashflow unpredictable, weak, or nonexistent because it's too early? In other words, are you pre-revenue because you're focusing on growth and user acquisition? If you answered yes to these, it's possible venture funding might be the right route for getting your company funded early on. For the rest of this course, we'll make the assumption that you're building a venture-backable company and are ready to start pitching your first investors.