What is the difference between Venture Capital and Private Equity?
The textbook answer most B-School professors would give is that venture capital is a subset of a larger private equity asset class that includes venture capital investments, LBOs, MBOs, MBIs, bridge and mezzanine. Historically, VC investors have provided venture capital capital to start-ups and early-stage companies, while private equity firms have provided secondary equity and mezzanine investment trenches to companies that are more mature in your corporate life cycle. Again, traditionally speaking, VC firms have higher critical rate expectations, will be more mercenary with their valuations, and will be more onerous in their management restrictions than private equity firms.
While the above descriptions are technically correct and have largely held true from a historical perspective, the lines between venture capital and private equity investing have blurred due to increased competition in the capital markets over the years. last 18 to 24 months. With the solid, if not frothy, state of the capital markets today, there is too much capital chasing too little quality business. 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 has created more competition among investors, raising valuations for entrepreneurs and lowering returns for investors.
This increased competition among investors has forced venture capital and private equity firms to broaden their respective horizons to continue capturing new opportunities. Over the past 12 months, I’ve seen an increase in private equity firms willing to consider early-stage companies and venture capital firms lowering performance requirements to be more competitive in securing later-stage opportunities.
The moral of this story is that if you are an entrepreneur looking for investment capital, your timing is good. While the traditional rules of thumb explained above can be used as a basic guide in determining investor suitability, don’t let traditional guidelines stop you from exploring all types of capital providers. While some of the ground rules may be changing, your capital formation goals should remain the same: consider proposals from venture capitalists, private equity firms, hedge funds, and angel investors as you try to work through the entire structure. of capital to seek the highest possible valuation. at the lowest combined cost of capital while maintaining as much control as possible.