What is the difference between Venture Capital and Private Equity?
The textbook answer that would be given by most B-School professors is that venture capital is a subset of a larger private equity asset class that includes venture capital, LBOs, MBOs, MBIs, bridge and mezzanine investments. Traditionally, venture capital investors have provided venture capital to start-up and start-up companies, while private equity firms have provided secondary equity traunches and mezzanine investments to companies that are more mature in their business lifecycle. Again, traditionally, venture capital firms have higher expectations of threshold rates, will be more mercenary with their valuations, and will be heavier in their management constraints than private equity firms.
While the above descriptions are technically correct and have largely retained their shape from a historical perspective, the lines between venture capital and private equity investments have blurred due to increased competition in capital markets over the past 18 to 24 months. With the robust, if not frothy condition of today’s capital markets, there is far too much capital chasing too few quality deals. The increasing pressure from money managers, investment advisers, fund managers and capital providers to place funds is ever high. This excess money supply has led to increased competition among investors, causing valuations for entrepreneurs and returns to investors to fall.
This increased competition among investors has forced both venture capital and private equity firms to broaden their horizons to continue seizing new opportunities. Over the past 12 months, I have seen an increase in private equity firms willing to consider earlier stage and venture capital firms to lower return requirements to be more competitive in securing later stage opportunities.
The moral of this story is that if you are an entrepreneur seeking investment capital, your timing is right. While the traditional rules of thumb first outlined above can be used as a basic guideline for determining investor suitability, don’t shy away from exploring all types of capital providers through traditional guidelines. While some ground rules may change, your investment goals should remain the same: Entertainment propose from venture capital investors, private equity firms, hedge funds, and angel investors as you attempt to work through the entire capital structure to seek the highest possible valuation at the lowest cost of capital mixed the greatest possible control.