Private Equity vs. Venture Capital

Every day there is news about the stock market's heavy hitters. GOOG, FB, TSLA and other big-ticket ticker symbols float across the bottom of news broadcasts. However, the vast majority of U.S. companies are privately held.
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So, if privately held companies can’t issue public stocks, how do they raise money?  Many companies bootstrap themselves with owner or family and friends equity or loans to start. Two other vehicles for raising funds are private equity and venture capital. Here, we'll discuss what each does, how they're different and similar, and why the private market remains so resilient and attractive to businesses and investors.

What's the difference between private equity and venture capital?

​Let’s explore the main differences between private equity (PE) and venture capital (VC) firms:

Venture Capital

Venture capital firms raise funds by gathering investments from limited partners (LPs), whose money they then invest. VC firms are known for focusing their investments on startups and other young companies that show high potential for growth and above average rates of investment return.  Often these companies are characterized by innovation or carving out a new industry niche.  Frequently, they involve some new technology or other innovation.  As such, VC investments are normally much riskier than Private equity investments but also have potentially higher returns.
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The role a venture capital firm takes following their investment frequently includes a Board of Directors seat and, consequently, significant input into its future direction.  They can also attract other investors and provide valuable connections for the company to expand their business.  Because of the amount of capital sometimes involved in these investments, numerous VC firms may invest in a given entity.  As such, a single firm does not often have a controlling interest in the company.  Also, sometimes, the founders maintain control by having special stock voting rights or control provisions that allow them to maintain control of the company.

Private Equity 

One of the most significant ways private equity differs from venture capital is in the type of companies in which they invest. Whereas venture capital primarily funds startups as they grow and blossom, private equity often invests in more established operating companies with opportunity for growth or improvement.

Private equity firms raise capital from institutional investors and wealthy individuals, often in a fund.  The fund or firm normally takes controlling interests in these more mature operating companies.  The investment of their equity is almost always coupled with debt, sometimes quite significant, to fund the company purchase price.  In some instances the prior owner of the acquired entity will also continue to hold some equity in the new entity.  They then seek to improve the company via additional growth opportunities (new products, new services, add-on acquisitions, geographic growth, enhanced sales and marketing capabilities, etc…) or operating improvements (cost reductions, improved technology, improved operating processes, etc…), leading to enhanced shareholder value.
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In accordance with its majority equity stake, the PE firm normally controls the Board of Directors of the acquired entity.  This gives them control over the management team and strategy of the acquired entity.

Payoff

One of the fundamental similarities between private equity and venture capital firms is that they both aim to achieve the same thing: leveraging their existing capital, resources, and knowledge to make businesses more profitable and more valuable.
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They get their payoff in similar ways too – normally from a sale or merger of the acquired company with another entity.  This could be an outright sale to another party, merger with another entity or a sale via an initial public offering.  Upon such an event the VC or PE firm achieves a return, which is ultimately passed along to its investors.

Why Is There So Much Interest in Venture Capital and Private Equity?

One of the primary reasons so much capital is flowing into venture capital and private equity is that yields on other investments have declined in recent years.  Investments in treasury bills and other debt securities have extremely low returns due to the low interest rate environment that has been in place for the last decade.  Additionally, there is a wave of baby boomer owned companies that have no transition plan and are being sold.  Private Equity firms are often great buyers for these companies, with ready capital and an infrastructure to manage the purchased entities.

Lauber’s Business Expertise ​

Regardless of what funding avenue your business chooses to pursue, you're going to experience a fundamental shift in the way your business operates. Startups that have been bootstrapped until their funding will suddenly be able to hire more employees, specialize their business operations, and scale upward. More mature businesses might need to change their organizational structure, operating procedures, personnel, financing facilities and other things as they pursue new growth. 
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Navigating these times is critical to the future success of your organization, and Lauber’s Finance & Accounting, Human Resources, Talent Search, Coaching and Planning services will provide you with the expertise you need to take your business to the next level. . A Lauber Fractional leader proficient in the most complex.  Lauber delivers its services fractionally (i.e., a day-a-week or on some other regular schedule), on an interim basis or a project consulting basis.

Contact Lauber Business Partners for Fractional, Interim or Project Consulting Leadership Today.

At Lauber Business Partners, we understand what it takes to deliver exceptional expertise that will significantly impact your organization’s success. Please contact us by email at [email protected] or by phone at 414-273-8060.