Should you be thinking about Venture Capital or Private Equity?

The principle behind these types of investment is much the same - investors exchange resources that can help a business grow for a share of the proceeds when the business succeeds. The investors reap their rewards by supporting ideas to achieve profitability.

In practice, however, there are significant differences in how they fund growing businesses. VC and PE investors focus on different types of companies, invest different sums of money at different stages in the company's growth cycle, and claim different amounts of equity in the companies in which they invest.  

Venture Capital Investors

Key characteristics:

• Typically invest in start-up ventures with a promising concept or technology
• Willing to invest in businesses not yet making a profit
• Attracted to disruptive business models with strong growth potential
• Valuation based on competitive advantage, IP and likely value at exit
• Typical 5-7 year investment horizon
• Take minority stakes
• Risk spread between multiple investors
• Exit via IPO, corporate acquisition or sale to another investor e.g. PE
• Usually funded by wealthy individual investors, crowdfunding, investment banks and/or financial institutions

Why choose VC?

As a business owner you may look to VC investment for a number of reasons. For example, growing your manufacturing and sales operations, enhancing product development, funding business expansion or growing your team. An investor may offer technical or managerial expertise, not just a purely financial investment. This is typically (although not exclusively) seen in technology-based sectors such as ICT, life sciences or fintech. 

How does it work? 

Venture capital investment is raised in ‘rounds’ – Seed, Series A, B, C etc. Each subsequent round may see further investment from the same investors and/or new ones to support the company as it grows. With each investor taking a minority stake, the risk of investing in a young company is spread.

Pros

• Access to expertise, network and connections not just funding. 
• More appetite for risk from investors and ability to invest in companies based on potential and not necessarily track record. 

Cons

• May bring outside pressure and influence in early stages of establishing business model.
• May result in a mix of shareholders.

Private Equity Investors

Key characteristics:

• Typically invest in more mature businesses
• Attracted to established business models with potential for more stable growth rates
• Look for businesses which are cash generative and so can support third party bank debt
• Restructuring approach - support firms struggling to grow or maintain profits
• Seek to take "active ownership"
• Work alongside management team to run business, enhance value and reduce inefficiencies
• Typical 4-7 year investment holding
• Take majority stakes / support management buy-outs and buy-ins
• Exit via sale of stake to corporate buyer, investor or floating via IPO
• Investment capital from high net worth individuals or financial institutions

Why choose PE?

For one reason or another, your business may find itself struggling to maintain profits. A PE firm taking a majority stake can step in with resources to help. By taking 'active ownership' and working alongside your management team the day to day running and value of the business can improve.  A PE manager will work with established structures, cash flow, assets and business models, taking a restructuring approach to improve operations and ultimately grow profits.

Pros

A majority backer rather than a disparate shareholder base means you are more likely to have everyone pulling in the same direction in pursuit of growth.

Cons

Although founders can often stay involved, PE investment typically brings a loss of control. 

* https://www.bvca.co.uk/Our-Industry

How we can help

Our Corporate team advises VC and PE funds as well as ambitious businesses looking to grow and raise investment and would be happy to speak to you.

Contributor: Amy Tough

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at November 2019. Specific advice should be sought for specific cases. For more information see our terms and conditions.