NEW License Categories Issued By Virtual Asset Regulatory Authority (VARA)
The classic startup investor that is primarily working to achieve returns for the funds they’ve raised from a set of Limited Partners. The partners at these funds are usually paid in two ways: they earn a % of the funds that they’ve raised and they earn a % of the return they make on the total fund from which they invest in you. These firms generally raise further funds based on the performance of earlier investments.
While investors make money off their management fees (the % of what they've raised), the big pay outs only happen when they return a multiple of the total capital raised. Because of how concentrated venture returns are, VCs generally invest only in deals which they believe will return all or most of their returns. Over the years we have seen club deals and name following.
Usually a wealthy individual or Family member who invests their own money in startups. Sometimes these are people that made money through their own startups. Sometimes they are coming from different industries, and sometimes they inherited their wealth. It can be useful to know which category of angel you are talking to.
These investors will put a small number of small checks into whatever company they can get into. Because they are unfamiliar with how startups work, they are often hard to deal with and incredibly focused on the risk of losing their principal. These are investors you should avoid unless you absolutely need them.
Accelerators are, for the most part, a subset of VC firms where there are professional investors who raise funds from outside parties to invest in startups. They usually fund more companies than classic VC firms, and do so in batches. Similarly to a VC, most accelerators need to demonstrate return to investors to continue to raise funds.
Crowdfunder Any and all comers on the internet who pre-order an unbuilt item in the hopes that it will some day get built and be cool/solve a problem. They’re not expecting financial return, but do want regular updates on what’s going on with the project and when they can expect delivery. Hiding problems is a lot worse than transparently failing to deliver.
These are the private investment vehicles for super high net worth individuals and families. Whereas some individuals invest their own money as angels, those that get to a certain scale often employ staffs of portfolio managers and investment professionals.
There are many different structures here. Some family offices are structured like single limited partner hedge funds with a high tolerance for risk, and others are structured more conservatively.
Whatever the risk tolerance, the staffs of family offices generally get carry on their investments as well as salary, which introduces some of the incentive dynamics present at VCs.
Generally, these entities are very concerned with not losing their principal. Whereas a VC fund that loses an entire fund will have a hard time raising other funds, a family office that loses all its principal has no recourse for more funds. Generally, if you get an investment from a family office, it will come from a small portion of a portion of an overall investment portfolio.
There are a lot of corporations that like to talk about investing in startups. Some of them actually do this, and some do not.
When an investment comes directly from the company's balance sheet at the direction of a particular business line, the corporation is usually looking for strategic value from the investment.
Most of these companies know that investing in startups is unlikely to change the valuation of the investor.
This means they either want an inside edge to acquire you at some point, or believe that investing in you will help improve their bottom line. They may want to prevent you from selling to competitors in the same space, and may have other confusing and onerous ideas. This is because their incentives are different that those of most startups - they are more concerned with how you can help them than with how they can help you get gigantic.
Corporate venturing – also known as corporate venture capital – is the practice of directly investing corporate funds into external startup companies. This is usually done by large companies who wish to invest small, but innovative, startup firms.
They do so through joint venture agreements and the acquisition of equity stakes. The investing company may also provide the startup with management and marketing expertise, strategic direction, and/or a line of credit.
While corporate venture arms have some of the misaligned incentives of direct corporates, they generally have a mandate to generate financial returns for the company's balance sheet. This means they act more like VCs, and are typically more conversant with how startups work
Governments have many reasons for investing in startups. There are many government grants available in various countries that are designed to promote startups to increase job growth.
There are also government agencies with their own venture funds, generally designed to fund technology to help the government in long run.
University endowment University endowments are similar to family offices, but they represent an endowment. They are designed to produce returns to fund the university over time. The entities do not generally invest in early stage companies except in with a fund with a strong relationship.
Seed investments involve investors providing funds in exchange for an ownership interest in the company. Common mechanisms are :
Common stock is the most basic form of ownership of the company.
Preferred stock provides preferential rights to the holder above common stock. Types are dividend preferences, liquidation preferences etc.
Many investors seek to avoid the difficulties associated with negotiating the terms of preferred stock. Instead, the company will issue a debt instrument to the investors.
A hedge fund is an investment vehicle that caters to high-net-worth individuals, institutional investors, and other accredited investors. The term “hedge” is used because these funds historically focused on hedging risk by simultaneously buying and shorting assets in a long-short equity strategy.
Hedge funds are largely unrestricted pools of capital. Traditionally, these were focused on public market investments, though in the last few years have started investing in startups. Generally, they invest in later stages and are looking for returns on capital as they have LPs and similar incentive structures to VC funds.
These are large pools of capital run by portfolio managers. They don't have LPs, rather they have large groups of retail investors who buy shares in the funds, which capital they can then deploy.
These funds only invest in late stage startups, because they need to deploy a lot of capital to have any kind of impact at the portfolio level.
These managers are paid based on performance, and often have reporting requirements that cause them to publish their internal marks for private companies. This has caused a lot of consternation lately as Fidelity has been publishing widely oscillating valuations for a number of companies like Dropbox.
These are the largest pools of capital in the world, and are essentially very large family offices for entire countries. These funds are large enough to invest in any and all asset classes that the managers believe will produce a return on investment.
Like mutual funds, these funds rarely invest directly in startups - they are more likely to invest in funds that do.
In the last few years, however, a number of them have begun to invest directly in startups. While the managers of these funds are generally paid on a performance basis, there are a lot of other complicated incentives in place at certain funds deriving from political requirements. These are pretty hard to parse.
While corporate venture arms have some of the misaligned incentives of direct corporates, they generally have a mandate to generate financial returns for the company's balance sheet.
This means they act more like VCs, and are typically more conversant with how startups work
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