March 24, 2020

Types of Investors in the Startup Ecosystem

 

As you immerse yourself in the startup ecosystem, you’ll get acclimated to terms like angel investor, venture capitalists, and more. But what are family offices? Sovereign wealth funds? We’ll cover the remaining types of investors prevalent in the ecosystem in this article! 

 

Institutional Investors

Private Equity:

Equity, or the shares representing the ownership of an entity, that is not publicly listed or traded. Traditionally, private equity refers to more mature businesses, but in recent years it has grown to include investing in startups and other high-growth companies. Private equity follows the LP-GP structure. Private equity takes many forms, the most popular of which are leveraged buyouts and venture capital. All venture capital is private equity, but not all private equity is venture capital.

 

Pension Funds:

Investment pools that pay for workers’ retirements. Funds are paid for by either employees, employers, or both. Pension funds result in employees having a portion of their income pooled with others and invested across asset classes like real estate, hedge funds, private equity, and more. 

 

Endowment:

A donation of money or property to a non-profit organization that uses the resulting investment income for a specific purpose. Endowment also refers to the total amount of a non-profit institution’s investable assets which are meant to be used for operations or programs that are consistent with the wishes of the donors. Many endowments are administered by educational institutions, such as colleges and universities, to increase their total amount of assets and are then used to fund operations or build new buildings. 

Foundations:

A category of nonprofit organizations or charitable trusts that will typically provide funding support for other charitable organizations through grants but may also engage directly in charitable activities. Private foundations are usually created with a single primary donation from an individual or business, and their funds and programs are managed by their own trustees or directors. Private foundations generate income by investing their initial donation in venture funds, hedge funds, or others, with the bulk of their investment income going towards charitable activities.

 

Hedge Funds:

A limited partnership of investors that use pooled funds and employ various high-risk strategies to earn outsized returns for their investors. The strategies employed can include long-short equity, volatility arbitrage, and others. Hedge funds are generally only accessible to accredited investors and other LPs that include family offices, foundations, and endowments, as well as many others.

 

Mutual Funds:

A financial vehicle in which pools of money are collected from many investors to invest in securities like stocks, bonds, and other assets. Mutual funds are operated by professional money managers who allocate the fund’s assets and try to produce gains or profits for the fund’s investors. 

 

Other Types of Investors

 

Family Office:

Private wealth management advisory firms that serve ultra-high-net-worth investors. Family offices offer a total outsourced solution to managing the financial and investment side of an affluent individual or family. Family offices can be single-family or multi-family offices.

Corporate Venture Capitalists (CVC):

Similar to venture capitalists except CVCs are established corporations like Intel, Samsung, Salesforce, and Google that act as an independent arm to invest in startups. CVCs may invest for the purpose of financial returns or, as is more often the case, for strategic reasons that involve investing in startups that align closely to the corporation’s business for the purpose of potentially acquiring the startup. 

 

Sovereign Wealth Fund (SWF):

A state-owned (not referring specifically to US states, but can be US states) investment fund or entity comprising pools of money derived from a country’s reserves. The funding for an SWF comes from central bank reserves which accumulate because of budget and trade surpluses, official foreign currency operations, and more. The money held in an SWF is invested, and the gains are then paid out to a country’s population as a dividend or used for incentives like in the purchase of electric vehicles. SWFs are among the largest contributors/investors in venture capital funds.

Investment Bank:

A financial institution that performs a variety of services like helping companies access capital markets through the stock and bond market, facilitating mergers, corporate reorganizations, and more. Investment banks are the primary means through which private companies are able to go public.

 

The KingsCrowd Advantage

Understanding the nuances between the various types of investors in the ecosystem is important so that retail investors can gain a better understanding of the various players and how investors may provide more value than others. Our mission at KingsCrowd is to provide institutional-grade research, ratings, analytics, and information to our users. If you’re interested in seeing more of what we do, please subscribe here.


21
About: Francis vu

An investment professional with a background in private equity and venture capital having spent time conducting investments at VU Venture Partners and Pacific Oak LLC with a finance and management degree from Tulane University.

View Francis vu's articles

Related Items

The Drive To Lower Minimums In RegCF

A couple months back, writing at the time for Crowditz… ...

public

The Pros and Cons of Preferred Equity Investments…

As you immerse yourself in the startup ecosystem,… ...

public

Knight Post: Equity Crowdfunding 101

This piece is part of the KingsCrowd Knight Collection. Put… ...

public

Get access to the first and only premium analytics and rating platform that enables informed startup investments.

Become an Informed Investor