Understanding the different kinds of investment available to your company or idea is vital to successfully raising capital. One important distinction is that between venture capital and private equity investments. Both are investments in private companies (those that don’t trade their shares publicly), but venture capital tends to invest in smaller businesses with potential to develop, whereas private equity tends to purchase stakes in more mature companies.
|Venture Capital||Private Equity|
|Type of company||Infant, developing||Mature, developed|
|Size of stake||Usually minority stake||Majority stake, or minority with significant control interest|
|Upside||High growth potential||Lower risk, potential to streamline|
|Typical investment size||<$10mm||$100mm|
Potential market size and the quality of your management team are vital to stress when raising venture capital.
Most important is potential market size. Because so many investments in nascent companies fail altogether, VC firms look to make huge returns on investments that do succeed. A large potential market is a vital indicator of potential to grow, because it determines the absolute best case of company’s future.
The quality of the management team is also very important. A company’s final product can be completely different from its first version, so talented people who aren’t wedded to their product is more valuable than an excellent initial product or a specific vision of the future.
When raising private equity, the quality of the management team is also important to stress. Most important however, is traction within the market. PE investments are larger and often companies have less potential to grow, so firms are prepared to tolerate much less risk with individual investments. Evidence of a concept’s validity and tangible assets (be they intellectual property or warehouses) assures investors that a company is a safer bet. This also means PE firms expect a much more concrete vision of a companies’ future than VC investors.
The quality of the management team is as important in PE investments as with VC investments. Although private equity firms’ larger stake means they usually have a more comprehensive role in running companies they invest in, this doesn’t mean they don’t care about the existing management: if a firm is going to have to work closely with a management team, they care even more about being able to maintain a good relationship.
Research Analyst, Summer ’19