Sometimes, people confuse venture capital with private equity. However, there are significant differences between these two concepts.
In this article, we'll go over what those differences are, some of the best venture capital and private capital firms in the world, and tell you how to obtain funding for your startup.
Let's dive in!
Private equity
Private equity involves investment in companies that aren't publicly traded. This source of investment capital comes from high-net-worth individuals and firms. These investors purchase shares of private enterprises or gain control of public companies to take them private to delist them from public stock exchanges.
A private equity firm usually acquires enterprises suffering from financial stress, poor management, or crippling debt. The firm restructures debt and hires new managers to improve operational procedures.
Most of the time, struggling companies welcome takeovers by private equity firms with the resources for a large-scale, long-term overhaul. That's because the alternative is usually corporate death.
3 private equity firms you should know about
Apollo Global Management LLC
As of 2020, Apollo Global Management LLC has $455.5 billion of assets under management. Its portfolio includes Caesars Entertainment Group and Norwegian Cruise Line. It has offices in LA, New York, London, and Singapore.
The firm invests money from pension funds, financial endowments, and other institutional and individual funding sources.
Blackstone Group LP
Blackstone Group LP has been one of the largest investors in leveraged buyouts in the last 30 years. As of 2020, the company's total assets under management were approximately $619 billion.
Its portfolio includes SeaWorld Parks and Leica Camera, and it has offices in New York, Dubai, Beijing, and Hong Kong. In 2019, Blackstone converted from a publicly traded partnership into a C-type corporation.
TPG Capital LP
TPG Capital LP was previously known as Texas Pacific Group. The firm is focused on leveraged buyouts and growth capital. It invests in industries including consumer and retail, media and telecommunications, industrial, technology, travel, leisure, and health care.
In addition to its Fort Worth, Texas, headquarters, the company has offices in Europe, Australia, and Asia. Airbnb and China Renewable Energy are two companies in its portfolio.
Venture capital
Venture capital is funding given to startups and small businesses with the potential to generate high rates of growth and above-average returns. This typically happens with innovative companies carving out a new industry niche.
VC firms identify promising startups or emerging high-growth enterprises. The group buys an equity stake in these businesses and uses their funds to fuel their growth.
Investors are gambling that their investment in the enterprises will pay off. For businesses that are relatively new or have an operating history of two years or less, venture capital is often the best way to raise capital.
This is particularly true if the enterprise doesn't have access to capital markets, bank loans, or other funding sources. A downside to venture capital funding is the investors obtain equity in the business, and therefore a voice in company decisions.
3 venture capital firms you should know about
Sequoia Capital
Most financial experts consider Sequoia Capital to be one of the top venture capital firms on the planet. Since its founding in 1972, Sequoia has invested in over 250 companies that control over $3.3 trillion in combined stock market value.
Companies that Sequoia invested in early on include Apple, Google, Oracle, YouTube, Instagram, Zoom, WhatsApp, LinkedIn, and PayPal.
The company has a worldwide presence, with offices in major cities including Singapore, Mumbai, London, and Tel Aviv.
Andreessen Horowitz
Andreessen Horowitz has its world headquarters in Menlo Park, California. Marc Andreessen and Ben Horowitz founded the company in 2009. It invests in early-stage startups and established growth enterprises, including the mobile, crypto, gaming, social, e-commerce, education, and enterprise IT sectors.
Benchmark
Benchmark is based in San Francisco and provides seed money to startups. Its focus on early-stage startups has allowed it to score big wins with Uber, Tinder, and Snapchat. Other companies funded by the firm include Dropbox, Twitter, Snapchat, Instagram, Zillow, Discord, and Yelp.
The firm's most successful investment to date was sinking $6.7 million in eBay, giving Benchmark a 22.1% stake in the company.
Differences between private equity and venture capital
Private equity firms primarily purchase mature companies that are already established. These are enterprises that typically aren't living up to their profit potential due to operational inefficiencies. Private equity firms buy these enterprises and streamline operations to boost revenues.
For the most part, private equity firms buy 100% ownership of the enterprises they invest in. This means that the firm has total control of the company after they complete the buyout.
On the other hand, venture capital firms primarily invest in startups with high growth potential. The startup cash VC firms provide often makes businesses more attractive to equity buyers or eligible for investment bank services.
Most VC firms prefer to spread out their risk by investing in many different companies. That's because if one startup fails, the VC fund isn't substantially affected.
A private equity firm typically invests over $100 million in a single enterprise. They prefer to put all their eggs into one basket since they invest in established businesses with a proven business model. In contrast, VC firms usually spend $10 million or less on each enterprise since their investments are riskier.
Private equity firms typically don't maintain long-term ownership. Instead, they prepare an exit strategy after several years. Essentially, they're seeking to improve upon the businesses they acquire so they can sell them for a profit.
How to get funding for your early-stage company
Since private equity firms mainly deal with mature companies, venture capital firms are your best bet for startup funding. However, obtaining venture capital funding for your startup can be a formidable task.
It might seem that the more VC firms you contact, the greater the chances of finding a willing partner are. But that's the wrong approach. That's because you'll waste too much of your time on companies that'll have zero interest in funding you. Instead, try to find firms that are the best possible fit for your enterprise.
Some questions to consider when you're looking for a good VC firm fit include:
- Is your company really a startup, or is it a small business? Venture capital firms are interested in exponential growth. If you can't offer this, it's time to consider other funding sources.
- What other enterprises have they invested in? Are those companies similar or different from your startup? Have they ever invested in a direct competitor?
- At what stage of funding do they like to invest? If they're primarily interested in enterprises at the Series A stage, you shouldn't be looking to them to give you seed funding.
- Does your long-term vision for your company match the long-term vision of the venture capital firm? For example, some might be looking for a rapid exit, while others are more interested in building value. Take a look at their previous exits to get a better idea.
The initial step in locating sources of venture capital is making an introduction to someone in the firm. However, keep in mind that venture capitalists rely on people they trust to vet deals.
See if you can find someone who knows someone in the company. Even if it's just an associate, you can work your way up to the full partnership.
If you can't find any connections, make the warmest possible introduction. This is any connection you can make to the firm to demonstrate that you've done your homework and aren't merely sending out form letters.
Look for any background you can dig up on previous deals they've done that relate somehow to your pitch. You can also read up on media articles where they mention the firm. By generating a bit of personality and warmth to what is otherwise a cold introduction, you can minimize the chances your pitch gets deleted.
Craft your elevator pitch
The first thing you'll need to send to potential investors is an elevator pitch. Remember, this isn't a sales pitch. It's a short, well-written explanation of the problem your startup solves, how you solve it, and how big the market is for your solution.
You'll also need to send a link to your pitch profile. This document explains more in-depth what you're looking for and offers a way for the investor to request additional information.
Presenting your pitch deck at a meeting
Once an investor finds more about you, you may be invited to present your pitch deck. A pitch deck succinctly encapsulates your idea across 10 to 20 slides in a PowerPoint document. Investors love pitch decks because they force you to brief and use visuals instead of an endless bullet point list.
In many cases, the pitch meeting is more about getting the investor to like you as a person than pitching an idea. That's why it's probably best to try to create a little rapport. Investors will often invest in a founder they like, even if they have initial reservations about the concept.
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