If you’re a business looking for funding to scale and grow, you may be confused by the options and the terminology. Take private equity and venture capital for example. While both types of finance are provided by investors in return for shares, there are major differences between them.
Private equity (PE) and venture capital (VC) investors provide different amounts of finance, look for different types of companies in which to invest, and typically take different percentage levels of shares in the target. PE targets will be private, non-listed companies, and VC companies will be start-up or early-stage businesses with high potential.
In this article, we look at these differences and make suggestions as to where you might go to secure either PE or VC funding.
What is private equity investment?
Private equity (PE) is a term used to describe finance given to a company in return for its shares. Typical investors are high net-worth individuals (sometimes called angel investors), private equity firms and institutional investors like pension funds.
Although some private equity investments involve buying a business outright, more typically PE investors take an equity stake. PE investors usually look for fast-growing, well-established, unlisted businesses, and they tend to invest for the long term – think four to seven years. At this point, they will seek to exit the business by selling their stake and hope to make a substantial profit.
PE is often used to assist management buy-outs or management takeovers, and the private equity investor will work closely with the business’s leadership team to help run and develop the business.
If you want to retain complete control of your operation, you may find the involvement of a private equity firm stifling. However, if you’re keen to harness the skills of expert advisors who can help you make efficiency savings, enhance your supply chain and boost sales, you may find the input of a private equity investor invaluable.
What is venture capital investment?
VC is a branch of private equity investment, specifically aimed at start-ups and innovative, small businesses with fantastic potential to grow and scale.
VC investors include single angel investors and institutions. Although businesses from all sectors attract venture capital investment, the preferred sectors are emerging and innovative such as tech. VC investors are on the lookout for high-potential companies that promise a rapid rate of growth and large returns. They may offer expertise alongside funding and are prepared to accept a higher degree of risk.
Just as with traditional private equity investment, you will need to give up a degree of control over your business in return for finance and advice. The venture capitalist will aim to exit your business after four to six years.
If your company is relatively new (less than two year’s old), VC might be a good choice for you, particularly if you’ve no other potential sources of funding such as bank loans.
Private equity vs venture capital
|Private equity||Venture capital|
|PE investors look for mature companies||VC firms invest in early-stage and start-up companies with the potential for high growth|
|Target companies may be struggling||Target companies are relatively new but show promise|
|PE investors may buy all or a large percentage of the target’s shares||VCs may invest in many businesses to spread their risk|
|PE investors may buy a company to turn it around and sell at a profit||VC investors are looking to help a company scale and grow so that they can turn a profit when they sell|
|PE investors expect to be heavily involved in a fewer number of businesses||VC investors will offer advice but the degree of their involvement will differ|
|Large amount of funding compared to VC investment||Smaller funding compared to PE|
|PE investors will invest in all sectors||VC investors target new and emerging sectors|
How to secure private equity or venture capital backing
Before you start looking for private equity or venture capital investment, you’ll need to make sure your business is attractive to investors.
For this, you’ll need a sound grip on your finances, a solid business plan and the perfect pitch. Without these, you’re unlikely to secure investment.
When you’re confident that you’re ready to face investors, you need to seek them out. Your local business network is a good place to start.
These websites are also good:
- The Angel Investment Network has over 250,000 angel investors looking to invest different sums of money all ready to hear your pitch, and you can pitch to them online
- Pitchbook provides data on the private equity and venture capital market in the UK and worldwide
- By becoming a member of the British Venture Capital Association, you can gain access to their member network that includes both VC and PE firms.
When your business is ready for funding, our team of corporate solicitors is ready to advise you on where to look, how to choose between PE and VC investment, and also consider other alternatives such as crowdfunding. We’ll help you prepare all the necessary documents such as term sheets, and share cap tables.