What is the difference between Venture Capital and Private Equity?
The textbook answer that most B-School professors would give is that venture capital is a subset of a larger private equity asset class that includes venture capital, LBO, MBO, MBI, equity investments. bridge and mezzanine. Historically, venture capital investors have provided high-risk equity capital to start-ups 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 business. business life cycle. Again, traditionally speaking, venture capital firms have expectations of higher rates of return, will be more mercenary with their valuations, and will be more burdensome in their management constraints than private equity firms.
While the descriptions above are technically correct and have largely stayed true to form from a historical perspective, the lines between venture capital and private equity investments have been blurred by increased competition in the equity markets. capital for the last 18 to 24 months. With the robust, if not sparkling, state of capital markets today, there is too much capital chasing too few quality deals. Increased pressure from money managers, investment advisers, fund managers, and equity providers to place funds is at an all-time high. This excess money supply has created increased competition among investors, driving up valuations for entrepreneurs and lowering returns for investors.
This increased competition between investors has forced both venture capital and private equity firms to broaden their respective horizons to continue to capture new opportunities. Over the past 12 months, I have seen an increase in private equity firms willing to consider earlier stage companies and venture capital firms lowering performance requirements to be more competitive in obtaining later stage opportunities.
The moral of this story is that if you are an entrepreneur looking for investment capital, your time 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 keep you from exploring all types of equity 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 across the entire business. capital structure to seek the highest possible valuation at the lowest combined cost of capital while maintaining the greatest possible control.