However, there are quite a few key differences between private equity and venture capital that will affect how your business seeks funding based on its current state.
Profitability: While private equity firms may want to invest in a company that are struggling to achieve a profit with the goal of restructuring and turning around the business, VCs generally invest in companies that aren’t currently profitable but are growing their top line at a significant clip. PE firms generally invest in highly-profitable, high-margin businesses with the hopes of growing said businesses and ultimately selling to larger enterprises.
Growth rates: Companies grow at different paces, depending on the markets; VCs tend to invest in newer markets where growth rates are exponential, whereas PEs tend to invest in legacy markets where growth rates are more stable. Private equity typically invests in companies with relatively slower growth rates of 20-50% year over year, whereas VCs are looking for explosive growth rates of 10-20% month over month or even more.
Ownership: PE firms are typically looking for majority ownership in the companies they choose to invest with so they can have total control over business operations. VCs, on the other hand, generally take minority positions in the companies they invest in. Larger VCs usually exert indirect control through board seats that they usually negotiate in an investment round.
Type of Businesses: The most common industry for VC investment is frontier tech-based startups with little to no track record in newer markets. These are businesses that do not require a lot of capital to get off the ground. In contrast, PE companies tend to focus on more established business in legacy markets, such as real estate and large brick and mortar businesses and even some older tech companies that have matured.
Are you willing to give up control of the business? Private equity firms are looking for total control; VCs generally aren’t.
Is your company a startup, or do you have a proven track record? VCs consider investing in early-stage companies, while PE companies look for more established businesses.
There are many other ways to fund a business outside of the Venture Capital and Private Equity if neither is for you. Here are a few resources you may want to consider: