Private Equity or Venture Capital?
Many successful online entrepreneurs have never looked past the next 12 months and prefer to react to the market as it happens rather than plan too far ahead. In the fast moving world of e-commerce, there’s a lot to be said for that approach. If your choice is to run a lifestyle business where you keep your operation at a size you can manage and fund all your growth plans from your profits; then you will not be looking for any outside investment.
But if you see yourself as the next Amazon or your business has really grown and you are looking at an exit sometime in the next 3-5 years, then you have some options to consider. In recent years we’ve seen many significant e-commerce operations choose the IPO route (Initial Public Offering) by floating on one of the stock exchanges around the World. The alternative to this is to seek an organisation that will both fund the next stage of your growth and help you exit. Enter the Private Equity (PE) and Venture Capital (VC) guys.
So what’s the difference between Private Equity and Venture Capital? Well, first it’s probably helpful to focus on their similarities.
- Both will be raising funds themselves from third parties who want a professionally managed group with specialist skills to manage their capital
- Both types of organisation invest in private companies and expect a financial return within a few years at most
- Both will seek to have some influence in your business through board membership or voting control
- Both will seek some protection for their investment by penalising bad performance
- Both will expect regular and formal financial information
So if this doesn’t sound like your bag – then it’s time to stop reading!
If on the other hand, you are willing to accept the likely price then you need to know where to start. There are two fundamental differences between these two types of finance:
- Private Equity groups will generally look to acquire 100% of a business and seek total control whereas Venture Capitalists will be more likely to take a minority position in the first instance
- Private Equity usually flows into relatively mature businesses where the risks of failure are perceived to be lower – whereas Venture Capital tends to be just that - a venture or even an adventure!
Some people may tell you that deal size is also an important factor where PE is only offered for certain transactions which meet a revenue or profit threshold. However, as more and more specialist PE operators spring up, this has been much less of a dividing line.
So, we’ve established that most Private Equity providers are likely to want to acquire 100% of your business or at least a controlling interest. Consequently, if it’s only growth money you are looking for while staying in charge, then a VC is likely to be your best option for a significant investment.
So what kind of money are we talking about? Well once again there are no set rules, but you have to consider that the ancillary costs for say a VC to provide funds will be similar whatever the amount they invest. So almost irrespective of the amount they are providing, they will still have similar costs for:
- Investigating the opportunity
- Negotiating the deal
- Due diligence
- Legal agreements
It makes sense, therefore, for them to try and generate some scale in a transaction rather than doing many more small deals.
As with many of the other options, it will pay to do your homework as to which organisations may offer you the best deal. These transactions can be structured in many ways using a combination of loans, equity investment and in some cases, specialised financial ‘instruments’ that have been invented just for the purpose. If you haven’t had some experience of these guys already, then it’s best to have a trusted advisor in your corner to make sure your interests are covered.
VC or PE money isn’t right for everybody, but sometimes it’s better to have a smaller percentage of something larger than 100% of something smaller. New investors can also tend to share the decision-making load as their interests are now aligned with yours – which can sometimes be a great relief.
We hope that you enjoyed this post and that you found it informative.
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