Private Equity vs. Venture Capital
What is the difference between venture capital and private equity?
The textbook answer that most B-Schoolers would give is that venture capital is a subset of a larger private equity asset class that includes venture capital, LBOs, MBOs, MBIs, bridge and mezzanine investments. Historically, venture capitalists have provided high-risk equity capital to startups and early-stage companies, while private equity firms have provided secondary tranches of equity and mezzanine investments to companies that are more mature in their corporate lifecycle. Again, traditionally speaking, VC firms have higher hurdle rate expectations, will be more commercial with their valuations, and will be heavier in their restrictions on management than private equity firms.
While the descriptions above are technically correct and have largely been historically true, the lines between venture capital and private equity have been blurred by increased competition in the capital markets over the past 18 – 24 months. In the stable, if not frothy, state of capital markets today, too much capital is chasing too few quality deals. The increased pressure from money managers, investment advisers, fund managers and capital providers to place funds is at an all-time high. This excess money supply created more competition among investors, driving up valuations for entrepreneurs and reducing returns for investors.
This increased competition among investors has forced both venture capital firms and private equity firms to expand their respective horizons to continue capturing new opportunities. Over the past 12 months, I have seen an increase in private equity firms willing to look at earlier stage companies and venture capital firms lowering yield requirements to be more competitive in securing later stage opportunities.
The moral of the story is that if you’re an entrepreneur looking for investment capital, the time is right. While the traditional rules of thumb first explained above can be used as a basic guideline for determining investor suitability, don’t let traditional guidelines stop you from researching all types of capital providers. While some of the basic rules may change your capital raising goals should remain the same: accept pitches from venture capitalists, private equity firms, hedge funds and angel investors as you try to work your way across the capital structure, to to seek the highest possible valuation at the lowest blended cost of capital while maintaining as much control as possible.
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