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StageAmountSourcePrivateequitycanbeseparatedintotwoprimarydivisionsinformalandformalinvestors.Friendsandfamilyconstitutesthesourceforinformalcapitalwhichprovidesmorethan100billionperyearinearlystagecapital.Formalprivateequityrepresentsinvestmentsfromhighnetworthindividualsangelsandventurecapitalfirms.Angelsareasourceofinvestmentofmorethan25billionin50000businesses.Venturecapitalinvestmentsrepresentabout25billionin3000businesses.Investorstypicallyanalyzeaninvestmentopportunitybyitsstageofdevelopment.Eachstageofinvestmentisintendedtoachieveatypicaloutcomeassociatedwiththedevelopmentoftheventuree.g.aseedinvestmentismadewhentheventureisstillpre-salesandpre-profittomoveittowardachievingearlysalesandinitialrevenue.Pre-seedstageProofofconceptSeed-stagePre-salespre-profitearlystageEarlysalespre-profitMid-stageGrowingsalesbreakevenLate-stageGrowingsalesprofitsExitLargegrowthpotentialThefollowingtableidentifieswhotypicallyinvestsateachstageandatwhataveragelevelofinvestment.Angelsandventurecapitalistsbothinvestatseedandearlystageshowevercomparativelyventurecapitalistsinvestinaverysmallnumberofseedstagedeals.Anexitoccurswhenacompanyisacquiredormakesaninitialpublicoffering.Pre-seedstage100000FriendsfamilySeed-stage500000AngelsSeed-stage2.0millionVenturecapitalearlystage5.0millionVenturecapitalMid-stage8.0millionVenturecapitalsLate-stage10.0millionVenturecapitalsExit11million-1billionInvestmentbankscompaniesTheearlierthestageofdevelopmentthegreatertheriskassociatedwiththeventure.Investorsrequireagreaterpotentialfinancialreturninviewoftakingagreaterrisk.Intheoryearlyinvestmentsaresmallerthanlaterinvestmentswitheachinvestorexpectingtorealizeanattractivereturn.Pre-seedstageFounders20XinsevenyearsSeed-stageAngelsVCs10XinsixyearsearlystageVenturecapital5XinfiveyearsMid-stageVenturecapitals3XinthreeyearsLate-stageVenturecapitals2XintwoyearsExitInvestmentbanks1.35XinoneyearUsingtheexpectedratesofreturnbelowconsiderthefollowinghypotheticalinvestmentscenarioFounderinvestment100000020000000Angelinvestment10000006000000Venturecapital300000015000000Total500000041000000Thisscenarioindicatesthattheventuremustbeacquiredforinexcessof41millionforeachoftheinvestorstorealizetheirexpectedreturn.GreatdealsnotgooddealsIttakesagreatdealofplanningresourcesandbusinessdisciplinetosurvivethecommercializationprocessachievethemarketobjectivesandrealizethefinancialreturnsthatmeetinvestorexpectations.ExceptionalReturnOnInvestmentROITheROImustbesufficienttooffsettheexpectedotherlossesupto80percentofaninvestorsinvestmentportfolio.DominantcompetitiveadvantagesToachievesuccessinahighlycompetitiveandemergingindustrythenewventuremusthavesufficientcompetitiveadvantagestobethedominantbusinesswithinitsindustrysector.ProvenmanagementInvestorsidentifythemanagementteamanditsboardofdirectorsastheprimarycriteriaintheinvestmentdecision.LargeandgrowingmarketsThefinancingmodelforahighriskventuredependsonalargeandgrowingmarkettorealizeanexiteventwithsufficientresidualgrowthpotentialtomakeanacquisitionattractiveforapublicofferingoranacquisition.IntheircomfortzoneInvestorsaremostlikelytoinvestinopportunitieswheretheyarecomfortablewiththesizeofthebusinessatacertainstageofdevelopmentandinasectorofwhichtheyareknowledgeable.SynergywithotherportfoliocompaniesInvestorsseetheobviousadvantagesofinvestingincompaniesthathavecommonalitiesandorsynergiessuchassellingdifferentproductsintothesamemarketsectororoneoftheportfoliocompaniesprovidingproductsorservicestoanotherportfoliocompany.PointeInnovation8magazinePrivateequityWhatarethesourcesPrivateequityWhatarethestagesofdevelopmentPrivateequityWhofundswhichstagesofdevelopmentatwhatamountsPrivateequityWhataretheexpectedratesofreturnbystageofinvestmentSourceAmountReturnPrivateequityWhatcriteriadoinvestorsuseintheirdecisionprocess