Unpacking company investment stages to help find your fit.
Part six (of seven)
In the sixth of our series of seven articles (in which we unpack the different stages of growing a business) we delve into the differences of private equity and venture capital – and find out what going down the private equity road means to companies wishing to grow.
Private Equity vs Venture Capital
Flash overview: Venture funding refers to an investment that comes from a venture capital firm and describes Series A, Series B, and later rounds. This funding type is used for any funding round that is clearly a venture round but where the series has not been specified. On the other hand, a private equity round is led by a private equity firm or a hedge fund and is a late-stage round. It is a less risky investment because the company is more firmly established, and the rounds are typically upwards of $50M (approx. £35.5M).
Although there are distinguishing factors between VC and PE, the lines are becoming increasingly blurred. Some companies are receiving big sums of investment from private equity, having already sucked up serious banknotes from venture capital firms. Case in point - Postmates, an on-demand delivery unicorn, has benefitted from mixed funding.
It’s unclear how much the two will continue to overlap, but – as with all areas of business – they’ll continue to evolve, driven by a desire to, equally, unlock the potential in businesses, and chase the dollar.
Private Equity: Steady Eddies
At the other end of the spectrum are private equity (PE) firms, which direct their attention to the more established businesses; those in need of capital injection and reorganization to be set up and sold for a profit. Think of them like house flippers – buy low, renovate, sell high. Or, in the words of asset management company, BlackRock: Buy, Change, Sell. Private equity also plays an important role for owner-operators to de-risk their personal net worth and remove the personal guarantees on leases and debt financings. There is only so far an entrepreneur should go to over-extend their personal balance sheet and personal risk to ensure a business' success. A private equity partner can give an owner: shareholder liquidity by means of a dividend or stock purchase, a long-term employment agreement, and rollover equity opportunities.
After buying a (usually considerable, compared with VCs) stake in an established outfit, a PE company sets about restructuring and revamping the business so that it delivers more dosh and can be sold for a sweet dime, for example, through mechanisms such as an IPO – initial public offering (see our jargon buster below!)
Because PE firms are placing their bets on horses that are already away and racing - it’s seen as far less risky investment than venture capital. Because PE entails direct investment – often to gain influence or control over a company's operations – a significant capital outlay is required, explains Investopedia. That’s why funds with deep pockets dominate.
Recently, JAXJOX, a global connected fitness equipment and technology brand (which debuted KettlebellConnect, the first smart kettlebell with adjustable weights, at CES in 2019), secured £7.7 million in Series A funding to propel its UK launch. And to show how far PE investment can stretch, Kajabi, a knowledge e-commerce platform that helps entrepreneurs build, market, and sell educational content online, has raised a mind-blowing $550,000,000 in private equity backing.
Look out for Part 7 in this series, when we crack some of the jargon associated with investing – and offer you a quiz which should reveal the best investment option for you.