What are the Difference Between Private Equity & Venture Capital

By July 18, 2018Blog-page

Consider as to why business owners would ask International Business Intermediaries advice to find the right venture capital provider that might have an interest on acquiring part and/or all of their company. Nor is it uncommon for start-up businesses to ask International Business Intermediaries as advisors about possible investments from private equity providers.

If you’re a business owner and you’re looking to raise capital and/or sell your company… please do not be afraid to admit if you are not aware of exactly whom you should be talking to.

The first this is to understand the distinction between venture capital and private equity providers and their product offering to save yourself time as well as to maximise the value of your relationships. The main two ways that these providers differ is in their investment strategy and desired level of risk. Here’s what you need to know.

Venture Capital Providers

Investment strategy

Venture capital providers mainly invest in smaller start-up operations that have high-growth potential. Each provider usually focuses their investment strategies on companies within one of three revenue stages: Seed-stage companies that have $0-1 million in revenue, early-stage companies that have $1-10 million in revenue and growth-stage companies that have $10-50 million in revenue.

Within a specific revenue stage, each venture capital provider will concentrate their investment strategy in a specific industry like technology, biotech, healthcare or clean technology. The typical investment structures that are used by venture capital providers within their desired investment thesis are equity and convertible debt.

Convertible debt is when a venture capital provider essentially gives a start-up company a low-interest loan that will transition into equity when the loan matures. However this would not eliminates the need to undertake a Business Valuation, all new company need to be aware of their true market value on identifying stock equity. It also is a way for new companies to obtain capital at a time when most banks won’t issue them a normal loan.

Investment Risk

As you may imagine, this investment strategy has a focus on those who are willing to consider a higher risk portfolio. It is likely that many of the businesses that venture capital provider invests in may fail, but if one company becomes “the next big thing,” they could still earn significant returns, thus making the risk favourable. This model strategy differs to the Private Equity model.

Private Equity Providers

Investment Strategy

Private Equity providers focus on mature companies — typically five-plus years in business with proven Revenue. Some of the factors they would look for prior to investing are: Solid management teams, good customer base, high margins and strong balance sheets. In the end

they want to put their money into businesses that are making money now and that will continue to make money for the next five to ten years with little changes in daily operations. They sometimes restrict their investment strategy with a focus on size and industry, but not often.

While private equity providers focus on companies that are more established than start-ups, they commonly invest when they believe that providing working capital to fund new product or service line development will result in expansion or when owners are looking to exit and the provider can easily sustain existing profits. To the same extent, they will likely be seeking add-on acquisitions of other complementary businesses in their space to build resource efficiencies and/or a shared customer base.

Private Equity providers typically structure their investments through limited partnerships, so that the provider gains the ability to directly influence the company as a general partner, but the actual investors are limited partners. The investment will have a maturation date, at which time the provider will sell the investment and return the principal and gains to the limited partners. They may also direct their strategy through a private equity fund, which are much more stringent in their decision making, having high EBITDA requirements.

Investment Risk

Private Equity providers invest in already established companies, often buying a significant ownership share. Since they take total control, their risk of absolute loss is minimal. However, because they  tend to have a higher holding share in each investment, one blunder can have a large effect on the provider’s returns.

Common Ground — Value Creation

Both provider types aim to earn returns above those of public markets yet do so differently. Venture Capital providers rely on the growth from their investment and companies for their own valuations to increase. Without some financial growth from their start-up investments, Venture Capital providers may not yield any returns.

Private Equity providers have the upper hand on creating more value through financial engineering, involving multiple expansions, debt pay-down and cash generation. Again, because these companies have turned a profit already in the past, it is expected that they should be able to increase their earnings into the future, under the advice of an experienced International Business Intermediary.


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