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What is the difference between Venture Capital and Private Equity?

The text book answer that would be given by most B-School professors is that venture capital is a subset of a larger private equity asset class which includes venture capital, LBO’s, MBO’s, MBI’s, bridge and mezzanine investments. Historically venture capital investors have provided high risk equity capital to start-up and early stage companies whereas private equity firms have provided secondary traunches of equity and mezzanine investments to companies that are more mature in their corporate lifecycle. Again, traditionally speaking, venture capital firms have higher hurdle rate expectations, will be more mercenary with their valuations and will be more onerous in their constraints on management than will private equity firms.

While the above descriptions are technically correct and have largely held true to form from a historical perspective, the lines between venture capital and private equity investments have been blurred by increased competition in the capital markets over the last 18 – 24 months. With the robust, if not frothy state of the capital markets today there is far too much capital chasing too few quality deals. The increased pressure on the part of money managers, investment advisors, fund managers and capital providers to place funds is at an all time high. This excess money supply has created more competition between investors, driving valuations up for entrepreneurs and yields down for investors.

This increased competition among investors has forced both venture capital and private equity firms to expand their respective horizons in order to continue to capture new opportunities. Over the last 12 months I have seen an increase in private equity firms willing to consider earlier stage companies and venture capital firms lowering yield 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 good. While the traditional rules of thumb first explained above can be used as a basic guideline for determining investor suitability, don’t let traditional guidelines keep you from exploring all types of capital providers. While some of the ground rules may be changing your capital formation goals should remain the same: entertain proposals from venture capital investors, private equity firms, hedge funds, and angel investors while attempting to work throughout the entire capital structure to seek the highest possible valuation at the lowest blended cost of capital while maintaining the most control possible.

An angel investor is one who does not desire much say in the management of the company in which he invests, and also favors a slower return on investment. However, it should be borne in mind that they still make investments in the hopes of making a profit. Angel investor groups are important means of private capital and often put in angel money into fresh companies.

Venture capitalists and angel investors are aiming for capital augmentation and revenue escalation, and proof that one’s business can bring sustained expansion over time, to offer a profit on investment.

The present venture capital market is still recovering from the burst of the “dot com bubble.” Venture capital continues to be a feasible means of funding startup companies. Entrepreneurs who have an appealing business concept should not be disheartened from seeking investment funds.

An angel investor is one who is eager to invest in a company in its nascent. While looking to finance a business idea, angel investors can be an ideal source for obtaining valuable funds.

An angel investor is not a worker or member of a bank, venture capital firm or other financial institution that generally puts together such investments.

Angel capital plugs the breach in start-up funding between the “three F” (friends, family and fools) and venture capital. Most venture capital funds will not take into account investments under $1 million, while it is hard to get in excess of $100,000 - $200,000 from friends and family. Thus, angel investment is a widespread investment option for high-growth start-ups.