What’s the main difference between private equity and venture capital?
The terms “private equity” and “venture capital” are frequently used interchangeably.
Both of these entities make investments in privately held businesses, the shares of which are not traded on any public markets.
However, venture capitalists typically invest in a company at an earlier stage in its lifecycle than private equity firms do.
To delve even further, we can classify private market investors according to the stage they are in:
1 Angel: Individuals
2 Seed: The initial check at the institution
3. Expansion: Series A through C
4. The Late Stage or the Crossover: C to IPO
5. Buyout, Majority Control, and Debt
Let’s dig into each
Angels are individuals that provide financial assistance to new businesses in their early stages, when the majority of institutional investors are unable or unable to do so.
It’s possible that they were the founders’ family, acquaintances, or even former coworkers.
In most cases, they make an investment when a business is attempting to move from PowerPoint to reality.
-Check Amount: $10,000 to $250,000
-Holding Period: Eight to Ten Years -Target Return: Greater than 75% Internal Rate of Return or 10x
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The initial institutional check into a firm is typically done by seed-stage investors.
Investing often entails activities such as conducting market research, developing new products, and expanding existing operations.
In most cases, this is the point at which the first full-time sales and marketing personnel are brought on board.
-Check Amount: $250,000 to $2,000,000
-Holding Period: Between 6 and 8 Years -Target Return: Over 60% Internal Rate of Return or 10x
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Growth investors often take part in Series A, Series B, and Series C rounds of funding.
After determining if the product is a good fit for the market, they add fuel to the fire.
When a company is scaling its go-to-market engine for exponential growth, this phase of the process has arrived.
-Check Amount: $10 Million to $50 Million
-Holding Period: 5 to 7 years -Target Return: >40% Internal Rate of Return or +7x Return on Investment
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4. The Crossover or the Late Stage
The goal of most businesses is to demonstrate effective expansion while moving in the direction of a financially sound long term profile.
The funds could be utilised to transition from a single product to multiple products and increase sales on an international scale.
When investing, investors frequently build starter stakes in order to go bigger at the IPO.
-Check Size: $50M – $150M
-Holding Period: Less than Five Years -Target Return: 25% to 35% Internal Rate of Return (IRR) or +5x
Read: How should founders approach venture capital investment?
5. Buying Out
When you do this, you buy the whole Venture, typically with the use of debt, so that you can improve its functionality and then sell it later.
LBOs, also known as leveraged buyouts, Take Privates, Rollups, Platforms, and HoldCos are all types of flavours.
In most cases, a positive free cash flow is required in order to successfully reduce one’s level of debt, which is pervasive.
-The size of the check might range anywhere from tens of thousands to billions of dollars, depending on the approach (see: Anaplan, Sailpoint, ForgeRock)
-Holding Period: Between Three and Five Years
-The target rate of return is 18% internal rate of return or above.
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