No matter what type of business you have or are wanting to start, money is always a primary concern on your list. Whether it’s raising enough money to get your business off the ground or perhaps getting the capital needed to purchase state-of-the-art equipment, you may be considering the ideas of private equity or venture capital. Are there differences between the two, and which would work best for your situation? Let’s find out.
The Type of Business
When it comes to comparing these types of investors, you have to look at the type of companies they are investing in. Private equity investors and venture capitalists are looking for two distinctly different types of businesses in which to invest. Private equity investors tend to prefer well-established businesses that have been struggling financially for various reasons. Typically the product or service has already proved to be successful and sellable on the marketplace. However, if you work with venture capitalist funders, this type of investor will be willing to assume much more risk with their investment, since they look at companies such as ones that have unlimited growth potential. Though the product or service of the company may not have proven statistics to guarantee sales on the marketplace, the unique offering is typically intriguing enough that the investor believes it will be successful.
Maintaining Control Over Your Business
Since you are the person who came up with the idea for your business and perhaps even got it off the ground, maintaining control over your business may be a top priority. If so, you’ll have a decision to make between private equity and venture capital investors. When you have private equity investors through private equity representation, you will be giving up majority control of your business, since these investors require majority stakes in their companies. However, venture capital investors typically only want a minority stake in your business, leaving you in charge.
The biggest difference between the two is that the private equity investors want to steer the decision-making process of the company. This does affect the product in that board members have to agree to updates or projects for improvements on the product before work can be allocated to those projects. In most cases, this slows down the production of minor updates. However, if the product requires updated versions to come out on a quarterly basis or even a yearly basis, then it is likely that a group of employees will be dedicated to that process. Venture capital investors, on the other hand, typically want to provide financial support while allowing the company to continue on its trajectory with product development and marketing materials. That being said, because a return on their investment is dependent on the company being successful, they will often check in with the head of the company and also may bring in consultants to help with the process. For start-ups, this freedom can be useful when it comes to funding larger production or employing specialists who can take the products to the next level.
Quick Turnaround or Long-Term Commitment
When you have private equity investors in your company, they are interested primarily in getting the business turned around quickly so that it becomes profitable. However, once this happens, they as majority owners can choose to sell the company at a profit. This can leave the business creators and employees in limbo while they try to prove their usefulness to the next owners. Though this isn’t always the case and in some cases, the purchase of the company includes details for how to handle the transition. Since the original business owner has a minority stake in the business, they don’t have the control to prevent a sale. Of course, the original business owner can sometimes buy back some of the shares of the company so that they can gain the majority stake and gain back the decision-making process. As for venture capitalists, they are more interested in long-term growth and large payouts for many years, meaning they will often stick around and continue to give you an opportunity to make their investments in your company pay off in a big way. Since they have a smaller amount of control over the company, they typically will only provide recommendations and may threaten to pull funding, however, they do not have the legal power to steer decisions. As a business owner, this freedom can be helpful to ensure that you get what you want out of your business.
Advice from Experienced Businesspeople
If there is one thing private equity and venture capital have in common, it is that both can offer you the chance to bring investors into your company who have a tremendous amount of real-world business experience, which can help take your company to new and successful heights. By working with investors, you have access to them and their network of experienced business people, which can be a valuable mentorship opportunity. That way you don’t have to go through all of the mistakes that other business owners have gone through and you can make the best decisions to begin with.
Since these two types of investment options are different in so many ways, always think carefully about what you may gain or lose before you make a final decision. If you are more interested in getting some funding to continue developing your business the way you want to develop it, then venture capitalist investments may be ideal. If you’re looking for more guidance or even an exit from your company, then private equity may be the best option for you.