Venture Capital vs. Private Equity
Venture Capital vs. Private Equity deals with two different types of investors, who vary in the stage they invest in, the type of agenda they have, the type of exit strategy they anticipate, and the way their capital is treated. Venture Capital is typically an earlier stage investor, who is primarily looking to help a company grow, or looking to help a company expand their revenues or market share. Private Equity is typically a later stage investor who is looking to purchase a company, or purchase a portion of the company’s equity in an effort to try to make the company more profitable, or more effective in its operations. Both Venture Capital and Private Equity firms objectives are the same, they’re both trying to generate a return on their investments, and have their money make more money.
The Stages They Invest In
Venture Capital is primarily an earlier stage investor. What we mean by this is, they are typically taking on more risk, by investing in a company at its earlier stages. This means that when a Venture Capital invests in a company, they may not have many sales, they may not show much profit, and they may still be in the early stages of trying to grow their business or their market share. Venture Capital funds or companies, look to invest into a company’s management team, they believe in the vision they have and are trying to help them build or develop the vision they have. They will try and be another asset for the company, in helping them connect with other companies they know, introduce them to new suppliers or people they feel can help them, or any way they can try to further develop the company and its underlying business. They are more along the lines of a partner, or a financier, than a competitor, or outside party.
Private Equity, on the other hand, is typically a later stage investor. They are interested in trying to acquire or purchase the equity behind a company, in order to obtain control of the business, to try and eliminate or cut costs, make investments the company was unwilling to make or find more ways to increase revenue or strengthen a company’s balance sheet or income statement. They are not the same as a Venture Capital company, as they typically believe they can do a better job than the existing management team, or have a different vision than the current management team has. There are examples where a Private Equity company simply is interested in owning the equity behind a company and believes in the management team as well. It all comes down to what their strategy is, the numbers their financial analysts calculate, the type of agenda they have, and what they feel is going to maximize or produce the best returns for their investment.
The Capital They Provide
Venture Capital companies or funds, are typically considered to be investing or providing growth capital or financing. This enables a company to grow it’s business, expand its market share, and generate higher revenues. They are trying to help the company scale it’s business, by being an early investor, taking on more risk, than a later stage one. It’s important to note that many Venture Capital firms and companies are investing alongside the company’s current owners, shareholders, or founders as well. They are becoming more of a partner, and investor with the current management team, and in the business, than they are in trying to replace them.
Oftentimes, when it comes to Venture Capital, they typically invest in what is called a round. The round a company invests in, depends on the financing or investment it has received prior, and the stage the company is at as well. You typically have an A round, a B round, a C round, a D round, and so on until a company either stops raising money, decides to go public, or sells the underlying business. Over time, as the business or company raises more money, or funds, the valuation of the company continues to grow or increase as well. Series A might’ve been at a $10 million valuation, while the Series B could be at a $25 million valuation, and the Series C could be at a $50 million valuation, and so on. The earlier a Venture Capital company provides equity to a company, the more valuable it is, and the more they get for their investment.
An important item to note is Venture Capital firms often have to wait until a company goes public, or sells to another company. The capital they provide is often tied up for a longer period of time and is less flexible. They make their money typically at the end of a company’s fundraising process, or when it decides to sell its equity through a public or private sale. This can take years, even decades in some instances, so Venture Capital investors, are often patient in nature, and have to believe in a company, its business, its management team, and watch it evolve over time.
Private Equity funds or investors are often providing capital that offers them direct control over a company, influence to a company’s board of directors, ownership of the company or it’s assets, or the opportunity to run the company or investment themselves. They are typically investing capital or providing equity in order to replace the current owners or management, or to try and run the business more effectively than the management team. They often look to make different purchase decisions, invest in new areas or markets to expand the business, try to enhance a company’s profit margin or profitability, reduce waste or unnecessary costs a company has, in order to make the company more profitable, or larger in size.
There are Private Equity firms or Private Equity deals where they buy non-controlling interests, or purchase smaller amounts of equity in a company, business, or investment as well. It all depends on the deal, the type of caveats or conditions they come with, and the objectives or agenda of the current business owners, shareholders, or founders as well. There isn’t typically a one-size-fits-all type of deal, each deal, company, investment, or asset is unique.
The Risk
Venture Capital investors often handle and take on more risk than Private Equity companies do because they invest in earlier stages. Venture Capital investors are often making bets, or beliefs that a company will execute on it’s business plan, grow and capture the market share they’re looking for, or develop into a bigger, more profitable company in the future. Many times, the companies that Venture Capital funds invest into, aren’t able to deliver the type of growth they are looking for, or grow the way they believed they could, resulting in substantial losses. When a Venture Capital does hit though, and they invest into a company that grows and delivers on it’s business plan or agenda, they are often handsomely rewarded, with big gains anywhere from 5x, to 10x, to 50x, depending on the time they invested, the capital or equity they received, the sale or exit price, and the capital they continued to invest in subsequent rounds as well.
Venture Capital companies hope that the amount of money they make from their winners ultimately is larger than the amount of money they invested in their losers. The companies and funds who are able to do that successfully, are often handsomely rewarded, and produce substantial gains from their investments.
Private Equity firms often bear less risk than Venture Capital companies, because they are purchasing existing business, existing companies, or existing assets that have proven and strong track records. On the other side, they are often rewarded with lower return percentages than Venture Capital companies, but the capital they provide is at less risk, and they typically have higher probabilities of success.
It’s important for Private Equity firms to monitor the market they’re investing into. They need to understand and constantly analyze the market forces at hand, the direction the market is headed in, any new developments or events that can affect their business or their investment, and act accordingly. They also need to make sure the decisions they are making are the correct ones. The business plan or agenda a Private Equity company utilizes is an area where they experience risk, and in making the wrong or incorrect decisions. The way they lead, or manage their company, has the potential to have a substantial impact on the type of returns they generate, the type of profitability they produce, and the type of value the investment has as well.
Venture Capital firms bear these types of risks as well in the development or evolution of a company, they just also have to bear the risk that a company may not evolve or develop into the type of company they’re hoping they can be, where the Private Equity company is buying an already existing company or asset, and then having to deal with these types of risks.
The Industries They’re In
Venture Capital companies invest in a variety of different industries from Finance, to Real Estate, to Healthcare, to Technology, to Retail, to Computer Software, to Computer Hardware. One of the underlying themes among Venture Capital firms, is they often invest in companies or businesses that have a tech component or are trying to become a technology-oriented company. Most of the company’s that raise money from Venture Capital firms, raise large sums of money to solve a particular problem, issue, or provide a solution to a particular industry or market.
Due to the size and scale of the investments Venture Capital firms make, the companies they invest into need to be tackling or trying to tackle very large markets or issues that can produce large sums of money or return to produce the type of returns they are looking for. They do invest in a wide array of different industries, markets, and companies, most likely without many limits, but they do need to invest in companies that have large potential payoffs and have the potential to produce large returns, in order to compensate them for the type of risk they are taking on, and the stage they typically are investing at.
Private Equity firms invest in a wide array of different industries and asset classes, from Real Estate, to Finance, to Healthcare, to Technology, to almost any sector or industry a company, business, or equity is in. Anywhere they feel they can make a substantial return, or where they feel there is enough of an opportunity for them to make a large enough amount of money they will look into it. They are ultimately trying to find ways to create or maximize value. If they can find an undervalued market, or a mismanaged asset or company, they’ll most likely have some level of interest.
Whether it’s through consolidating a company they own with a new company, or by investing more capital into a distraught or struggling company, or by managing a company more effectively, anyway they can find an opportunity to produce a return on their capital, or where they can deploy their capital to purchase equity, they’ll have some level of interest. Their scope is typically not as wide as a Hedge Fund, which can play in a very large or wide area of assets and industries, but Private Equity firms typically focus around a business, a company, or an asset, where there is equity to purchase or acquire.
The Exit Strategies
Venture Capital companies or funds exit strategies are typically through a private or public sale. The companies they invest in, and the returns they make, are typically tied to the sale of a company’s equity to the public markets through an IPO, initial public offering, or through a private sale to another company. Private Equity company’s exit strategies depend on the nature of the asset, company, and market they’re investing into. They can sell to another company, issue shares to the public, sell a portion of their equity, merge with another company, or any other way they believe will maximize their return and value.
Conclusion
Venture Capital is typically considered earlier stage investing, where the fund or investor typically aligns themselves with the current management team, vision, and business plan the company hopes to bring to fruition. Venture Capital investors are typically partners, who help a company during their growth to grow faster, acquire more market share, or help them build and develop their business. Private Equity investors on the other hand, are typically later stage investors, who are looking to acquire or purchase a company, its assets, and control of the company as well.
Both Venture Capital and Private Equity have the same objectives, which is to generate a return on their investment, and make their investors or capital providers more money than they invested. The way the two do it is a bit different, with Venture Capital companies taking on more risk for more reward, while Private Equity companies take on less risk, and with less reward. The way Venture Capital companies tend to exit is through public or private sales, versus Private Equity companies sell in a variety of different ways from selling to another company, breaking down the company for parts, merging with another company, or other ways they can exit their investment.
Venture Capital and Private Equity are two different investing strategies that share the same objective while carrying about the way they produce returns varies among the companies, asset classes, investment structures, and stages of an asset they are looking to invest into.
