Private Equity Versus Venture Capital: Which One is Right for Your Startup?

Venture capital (VC) has become more accessible than ever, thanks to new platforms like FundVest and AngelList.

However, it can still be intimidating. Venture capital firms operate at the highest level of finance, while startups operate at the lowest level. But venture capitalists have a proven track record of identifying successful companies and backing them with the money they need to grow.

On the other end of the spectrum, private equity versus venture capital, which often specialize in buying small businesses for their cash flow or their portfolio of names. They generally don’t take on entrepreneurs as their primary focus, but rather invest in companies that will help them grow and expand into new markets.

Private equity funding tends to be cheaper than VC for startup funding, but you give up some control by selling your company instead of keeping it privately held indefinitely.

With that in mind, which one is right for your startup?

What is venture capital?

Venture capital is one of the most popular methods of financing new business ventures. The term is often used interchangeably with the term “seed capital,” which comes from the days when most startups relied on angel investors to launch their operations.

Venture capitalists provide capital to high-risk investments with the hope of a large return. Venture capital firms or funds invest in these early-stage companies in exchange for equity, or an ownership stake.

If a company they invest in goes public, they make a profit so they mostly make profit through an eventual “exit” event. If a company they invest in isn’t successful, they aren’t responsible for the loss but of course their investment would have no or little return.

Venture capitalists invest large amounts of money that can take years to earn a decent return (think about IPOs that take at least a few years to materialize).

However, they can be one of the best ways to get your idea to the next level since they contribute more than financing to these early-stage firms; they also often provide strategic advice to the firm’s executives on its business model and marketing strategies.

What is private equity?

Private equity firms are a type of financial organization that serves as a kind of middleman between investors and companies. They buy large companies and then sell them again, either to finance other companies or to an outside investor.

While private equity firms generally aren’t interested in the day-to-day management of businesses, they are interested in the companies themselves.

They may buy underperforming companies and then restructure the operations to increase profits and return on investment for the shareholders. Private equity firms can be a good way for you to gain exposure to the business world by partnering with investors who can help you launch your ideas.

However, private equity firms are only interested in maximizing their returns, so they don’t usually spend time on the long-term growth of the businesses they own.

Private equity versus venture capital firms seek to reduce agency costs and align the incentives of corporate managers with those of shareholders by backing startups. This means that a greater proportion of firm retained earnings is distributed to shareholders than is reinvested in the firm’s workforce or equipment.

Differences Between Private Equity Versus Venture Capital

We explain below the main differences between VCs and PEs.

– Investment: Investing in startups is the most common use of both funds. Venture capital firms generally focus on investing in new companies and have a very high risk of losing the investment.

Private equity firms generally buy companies that are already successful and are interested in seeing them make money. They often invest less money and take a lower risk of losing their investment.

– Focus: Private equity firms are often interested in buying struggling companies that could be turned around for a profitable return. Venture capital firms are typically interested in funding new ideas and innovative founders that can lead to profitable businesses.

While private equities may purchase a small startup like a VC,

– Timeline: Private equity firms generally invest for profit with a rather short term approach, whereas venture capital funds are generally meant to fund growth-oriented venture for a set period of time.

– Who owns the companies: Venture capital firms generally want ownership of the companies they fund and often have to buy out the majority ownership of the company. Private equity firms are more likely to just profit from the returns on the investment.

Which Type is Better: Private Equity Versus Venture Capital

Investors usually enter the scene when your company has already been formed, has a product/service that people want, and have a business model that can turn a profit.

This is not the best time to invest your life savings into a new venture because you’ve got nothing to show for it. If you’re just getting started and have little experience with investors, venture capital is probably the best way to go.

For example, if you have some early traction, some sort of product-market fit and/or a few paying customers, VCs can be an attractive option to consider because they seek to invest in startups that are starting to scale their business.

Private equity firms are usually better at buying underperforming companies and restructuring them to make them more profitable. These firms will usually invest less money than venture capitalists, and you could see a better return with less risk.

However, private equities do not concern much with growth and innovation and prefer to invest in later stage startups with a proven track record. They are less risk taking and engage much more with the managerial decisions of the firm.

Venture capitalists generally focus on new ideas and early stage ventures whereas private equity firms are more interested in buying late stage ventures and mature companies.

The best VCs and PEs to work with

The leading VCs with an impressive track record of investment in successful startups are as follows.

– Sequoia Capital: Sequoia Capital is one of the oldest, most successful venture capital firms in the world. They have backed some of the most successful companies in the world including Apple, Netflix, and Google. If you have a tech-related business, Sequoia is a good option.

– Benchmark Capital: Benchmark Capital is one of the most active VC firms in the US, investing in over 300 companies. They are active across multiple industries, especially in the healthcare and transportation sectors.

– Greylock Partners – Greylock Partners is a newer venture capital firm that invests in a diverse range of industries including technologies such as cybersecurity and financial services. They have backed some of the most important companies in the healthcare sector.

The leading PEs with an impressive track record of investment in successful startups are the following.

– Sequoia Capital: You’ve already got one of the best venture capital firms in the world on your team, why not partner with them again? Sequoia is one of the best private equity firms in the world and has a long track record of success.

– American Express: American Express is a large financial institution that also invests in startups. They are perfect for opening a single account to manage both private equity and venture capital investments.

– Goldman Sachs: Goldman Sachs is a top bank that also invests in startups. They offer a great mix of private equity and venture capital investments.

– JP Morgan: JP Morgan is a large financial institution that also invests in startups. You’ll get a mix of venture capital and private equity investments. The advantage of working with Goldman and JP Morgan is that they know a lot about IPOs that can help your startup further down the road.

Summing up

There is no one best way to raise money, and what works well for one person may not work well for you.

Venture capital is great for those with proven track records and proven ideas, whereas private equity is great for those with proven track records and proven companies.

Venture capitalists are riskier than private equity firms, but they are typically more profitable. Which one you choose will depend on your individual situation, your goals, stage of startup development, and the type of investment you’re most interested in.