Difference between Seed Funding, Angel Investments, Venture Capital and Initial Public Offering

Corporate finance is essentially concerned with issues on how effectively the funds are deployed in assets, the management of assets having financial values, and how timely and economically the finances are arranged, from outside or from within the business. The success of a business depends considerably on the successful integration of corporate finance into that business. The object of Corporate Finance is the acquisition and allocation of corporate funds or resources to maximize shareholders' wealth. Now this acquisition and allocation of corporate funds can be done in two ways— by issuing equity shares (i.e. ownership rights) and by way of borrowings (i.e. debt).

Business Dec 6, 2020 0 Add to Reading List

Difference between Seed Funding, Angel Investments, Venture Capital and Initial Public Offering

Introduction

Corporate finance is essentially concerned with issues on how effectively the funds are deployed in assets, the management of assets having financial values, and how timely and economically the finances are arranged, from outside or from within the business. The success of a business depends considerably on the successful integration of corporate finance into that business. The object of Corporate Finance is the acquisition and allocation of corporate funds or resources to maximize shareholders' wealth. Now this acquisition and allocation of corporate funds can be done in two ways— by issuing equity shares (i.e. ownership rights) and by way of borrowings (i.e. debt). For our discussion in this article, we will set aside the discussion of debt finance and focus on the differences between different types of equity finance.

Definitions

All the types of funding for our discussion are different types of equity finance that means, in exchange for investments, the benefiting company will issue an equity share or ownership share of that company to the investors. Now, before going into the differences, let us look at what are the definitions of these investments—

Seed Funding: Seed funding is the capital needed at the initial stage of incorporation of the business or the initial stage of expansion of the business. It often comes from the company founders’ assets, from family and friends, or other similar investors.

Angel Investment: Angel Investment is a Category-I Alternative Investment Fund (AIF) regulated under Chapter IIIA of SEBI (AIF) Regulations, 2012. Angel Investment is an investment into a venture capital undertaking/startup which complies with the criteria issued by DIPP under the Ministry of Commerce and Industry, Government of India. Angel Investment Fund raises funds from angel investors who fulfill certain criteria under the SEBI (AIF) Regulations, 2012.

Venture Capital: Also known as Venture Capital Fund (VCF), is a fund established in the form of trust or a company which is registered under SEBI (VCF) Regulations, 1996 having a dedicated pool of capital, raised in a manner specified in the regulations and invests according to the regulations.

IPO: IPOs or Initial Public Offerings means an offer of specified securities by an unlisted issuer to the public for subscription and includes an offer for sale of specified securities to the public by any existing holder of such specified securities in an unlisted issuer. IPOs are governed by SEBI (ICDR) Regulations, 2018 and the issuer company shall comply with these regulations before making an IPO of specified securities (i.e. equity shares).

So far as the definitions are concerned, it is very difficult to distinguish between these four types of equity financing. However, there is an indication that, depending on the company structure, valuation, portfolios the nature of the requirement of investors will change.

Differences

Now let us look into the difference between these types of equity financing to get a better understanding of the same.

Categories	Seed Fund	Angel Fund	Venture Capital Fund	IPO
Nature of Funding	Private	Private	Private	Public
Investors	Generally, promoters, members, family or friends of the promoters, other similar investors	Generally Individuals or a small corporate body	Large corporations, banks, foreign companies	General public, corporation
Investor’s Experience	Generally least experienced	With less experience or may have high-level experience	Professionals having a high level of experience	Mayor may not be experienced
Listing in Stock exchange	Unlisted	Unlisted	Unlisted	Listed
Pressure of Repayment	Very less	Less	More	Less
Transferability of Equity Shares	Not transferable	Not Transferable	Not Transferable	Transferable
Regulation	Can be regulated by SEBI under AIF Regulations, 2012 or VCF Regulation, 1996 depending on the amount	Regulated by SEBI under AIF Regulations, 2012	Regulated by SEBI under VCF Regulations, 1996 and Companies Act, 2013	Regulated by SEBI under ICDR Regulations, 2018
No. of times equity shares can be issued	No limit	No limit	No limit	Once
Condition precedent	Not as such	Not as much	The expectation of five to ten times higher returns than what they have invested	Not as much because going for an IPO indicates the company’s confidence in high returns
Tenure of Investments	Variable depending on the nature of investments	Minimum 3 years Maximum period of 5 years	Minimum of 3 years	No limitation as the shares are transferable
Investment Amount	Very small, generally few lakhs	Minimum 25 Lakh Rupees, maximum 10 Crores	Not more than 25% corpus of the fund	Determined by Merchant Banker based on book-building process (fixing of share price)
Paperwork	Least	Less	More	Most
The burden on the business	Least burden (as generally, founders themselves are the investors)	Less Burden (less involvement in the decision-making process)	More Burden (investor involves in the decision-making process)	Most Burden (Dilution of ownership rights)

In India, there is as such no major differences between Seed Funding, Angel Investment Funding, and Venture Capital Funding. Angel Investment Funding and Venture Capital Funding (VCF) are both Alternate Investment Funding (AIF) and Angel Investment Funding is a subset of VCF. VCF has a wider ambit compared to Angel Investment Funding. The introduction of AIF by SEBI was to govern unregulated entities and create a level playing ground for existing venture capital investors. Seed funding, on the other hand, is considered to be a kind of Angel Investment Funding with less or no contracts and a small number of investments. But if the investment amount is on the higher side, it may be considered as Angel Investment Funding or VCF and will be under the purview of SEBI regulations.

To know more about, how angel investors approach for startup or business idea, see the video below -

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Conclusion

In a general sense, these four types of equity funding are separated by very thin lines of differences. Some of them have a general understanding while others are for specific purposes. For example, Seed Funds and Angel Fund are specifically to promote startup business in their early stages of growth while Venture Capital Funds and IPOs are generally opted by businesses which are already well-established or which are predicted to give a high rate of interest in the future. But there is as such no bar for a startup that is in its initial stages to opt for funding from the VCF or IPO if they fulfill certain regulatory requirements by SEBI. Moreover, the policy of opting for funding may vary from sector to sector of the industry. While one type of Funding may be beneficial for the manufacturing sector, it may not be beneficial for the IT sector. Thus, consultation with a professional is sometimes a more suitable way to approach the right type of funding.

To know more about, What is Joint Venture and how does it work?, Kindly see the video below-