Coming to the Bay Area, one noticeable difference is how people inquire about ‘investing.’ Rather than asking, ‘What type of investments do you do?’, people say, ‘Which stage of the company do you invest in?’. The underlying assumption is that an investor invests in startups. It’s an understandable guess in the context of Silicon Valley but most likely not true in other parts of the world.

However, stereotyping investing into a certain type is not unique to Silicon Valley. Depending on one’s experience, most people see investing through their own lens without appreciating the broad spectrum of investing.

Almost every economic activity is fueled in some way through investing. Investing is a channel for money to flow from one side to the other. The receiving end can be a business, a project, or even an asset, which uses the capital received to generate more money. As a fundamental piece of economic growth, investing takes place in all walks of life.

Investing can be categorized in different ways, depending on who’s receiving and who’s giving. Professional investors tend to specialize in different types of investing based on their risk appetites and analytical frameworks. But at its core, investing is almost always about comparing risks and rewards.

Capital Receivers

Three types of entities usually exist on the receiving end:

Companies

Depending on the stage of the company, company investing can be further broken down into below categories:

Angel investing

  • What: Investing in early-stage start-ups
  • Style: often by individuals who are willing to get involved in the startup’s day-to-day and play an advisor role
  • Investment edge: a great angel investor usually has an extensive network to source ideas and help existing founders; they often have deep industry expertise, rendering them the knowledge and the intuition to pick the right ideas and select the right founders.

Venture investing

  • What: Investing in startups at various stages; can be distinguished by the funding rounds they participate in (preseed/seed, series A, B, C, etc.), which usually marks the growth stage of the company.
    • Preseed/seed: investing with a small cheque of up to a few million to help the startup get the product off the ground, experiment with go-to-market strategies, and build initial traction. In addition to venture, some accelerators are now also participating in preseed/seed-round funding.
    • Series A: investing in a startup that has figured out its product-market fit and needs money to further enhance its product and penetrate the market while planning to scale.
    • Series B onwards: investing in companies that have largely de-risked and are ready to scale. Some Private investors also participate in this stage.
  • Style: a lead investor will usually put down the first cheque inviting others to follow; often a diversification game, with a few successful exits offsetting the loss from all the other failed ones.
  • Investment edge: Similar to angel investing, connections and deal flows matter a lot in the success of a venture fund; a respectful venture investor often also has market, product, technology, or business model expertise to help founders get through their growing pains.

Private company investing

  • What: Invest in mature, private companies with stable cash flows
  • Style: focus on cash flow analysis and projections. Private equity investing usually involves buying significant amounts of shares or even taking control of the company in a single transaction, requiring sophisticated transaction expertise. Private debt investing also differs from venture debt in its rigorous and nuanced structuring of debts and terms.
  • Investment edge: given that private company investing takes a more concentrated approach, understanding the business strategy is critical. This requires a good grasp of the industry and the market, clarity of the existing business model and the key risks, and a sound judgment of the growth/existing path supported by cash flow projections.

Public company investing

  • What: Invest in companies that are already IPOed. One can do so by buying individual stocks, bonds, or Funds/ETFs. Thanks to Robinhood, this type of investing is now accessible to almost anyone.
  • Style: Professional investors who trade public companies usually follow a much more rigorous process, enabled by the vast amount of data available through the stock exchange and all sorts of platforms. Different investors develop and adopt different analytical processes and can be differentiated further accordingly:
    • Passive (Beta) vs Active (Alpha) investors: Passive investors see little value beyond market returns (i.e., returns from the broad market average) and focus on diversification across different markets and managing macro risk rather than picking individual industries or companies.
    • Quantitative vs Fundamental investors: Both are active investors. Fundamental investors focus on analyzing the business fundamentals and the cash flow implications to find mispricing and arbitrage opportunities. Quantitative investors rely mostly on processing historical data to discover patterns. They build trading signals through backtesting and simulation, even when economic rules fail to apply.
  • Investment edge: the analytical framework adopted by different investors plays a critical role in differentiating who can win in the long run; managing downturns and avoiding big losses is another crucial element in improving compound returns. For fundamental investors, industry expertise and connections can add big values; for quantitative investors, differentiating data can be a major lever, which is why many HFs are willing to pay millions for a unique data set.

Projects

Project investing may sound foreign to many, mostly because it’s performed mostly by professional investors at the institutional level. There’s usually a large sum of money involved with various participating players. However, all of us benefit from the results of project investing: the majority of infrastructure we rely on for our daily activities, from buildings to roads, from power plants to wind turbines, are developed and financed through project investing.

  • What: Project investing is very similar to company investing, except that the risk and reward are tied to a project rather than a company. The risk of financing through this channel is then contained to the individual project. Even if the project goes under, the company can continue operating. This significantly lowers the risk a company has to take when developing a large-scale project with an extended timeline and a tremendous amount of risk involved.

  • Style: From an analytical standpoint, project investing also follows a similar process to fundamental company investing, in that it’s about understanding the cash flow and the risk involved.
  • Investment edge: domain expertise for good judgment; sound process for cash flow analysis and risk management.

Assets

Unlike company and project investing, where there’s inherent value creation, asset investing is largely an arbitrage game to take advantage of the mispricing, which can be either driven by supply-demand imbalance or sometimes simply subjective views of the fair market values.

The most common type of asset investing is real estate investing, which can be further classified based on the use of real estate.

Commodity investing is another type of asset investing. Professional commodity traders invest in energy, metals, and agricultural products following different processes, some based on economic fundamentals, while the rest rely on quantitative analysis.

Currency investing can also be considered asset investing, where investors find arbitrage opportunities in different currencies.

The sexier asset investing includes arts and wine investing. Such investing is usually more interest-driven, focusing less on the outcome and a sensational experience on its own.

Capital Givers

On the giving side, capital usually comes with different risk and reward appetites, guiding the investment strategy.

By its place in the capital stack:

From the capital stack perspective, the money can come either in the form of equity or debt (bonds in the public markets). Bond/debt investors get paid first through interest, a pre-determined, steady stream of cash flows, while equity investors get paid last with the remaining cash flows. Because debt/bond investors are more likely to get paid but with limited upside, such investors take on less risk and experience lower returns than equity investing, who get to keep all the upside but are expected to absorb all the losses. Equity and debt/bond exist in both company and project investing.

  • Starting from startup investing, both equity and debt venture investors exist. While most VCs are equity investors who give money to founders in exchange for shares, venture debt investors exist, providing non-diluted capital and funding early-stage companies through lending.
  • Once the startup graduates from its formation stage, it can also tap into both pools. A growth-stage startup or mature private company can seek funding in growth-stage VC or PE through equities, but also private debt investors through a variety of debts, from direct lending and mezzanine debt to senior secured loans.
  • Once a company is IPOed, even larger pools of capital exist on both sides. On the equity side, the company can issue shares, and an investor can invest in the company simply by buying stock shares. A public company can also finance its balance sheet by issuing bonds, which get rated based on their default probability and come with different yields. A bond investor, by picking and investing in bonds, effectively lends money to the company and gets paid through interest.
  • A similar classification exists in project investment. While infrastructure investors may come in as equity investors, most projects rely heavily on debt throughout their lifecycle. In the renewable energy world, a specific type of debt-like investor exists in the form of tax equity. They get paid mostly through the tax credit generated from developing clean energy projects with a return profile similar to a debt investor.

By source of the capital:

The source of the capital usually also has great implications on its risk and reward needs:

Some investors invest the money they own and focus on growing its value over time, while others raise money from the outside and have to generate returns over a specific period :

  • Individual investors: most individual investors invest their own money, have different risk appetites, and also have the most flexibility in how they invest. However, limited by their capital size, most individual investors operate in the public markets through fund/ETF/stock investing.
  • Institutional asset owners: include sovereign funds, pension funds, endowments, foundations, and family offices. Sovereign and pension funds are usually guided by country/state policy. Foundations, endowments, and family offices also have their own mandates to follow. By owning the money, institutional asset owners get to focus on long-term value appreciation rather than short-term returns.
  • Asset Managers: professional investors who raise money from outside, including both individual investors and institutional asset owners, and invest on behalf of their clients. They usually have performance mandates relative to the markets and, as a result, are vulnerable to ‘short-termism.’
  • VC/PE/Hedge Funds: professional investors who invest on behalf of their clients, although sometimes their own money. This is the most performance-driven cohort with performance incentives embedded in its fee structure. Chasing returns is the name of the game.
  • Philanthropists/governments funding: sometimes known as concessional capital, such money is usually directed for specific purposes, such as funding projects with public goods, supporting innovation that has yet to show commercial value, etc.

Whether you are an investor or looking for capital, I hope you find this post useful in understanding the landscape and navigating various types of investing.