Both startups and companies in high-growth stages require investment to get to the next stage of their lifecycle. The methods available for growth vary, with Private Equity Investment and Venture Capital Funding at the top of most owners’ and founders’ radar.
Private Equity and Venture Capital both exist in the “private markets” world (as opposed to public markets in which companies are publically traded). For an investor, this means that the regulatory compliance issues are different and the structure of the company is likely more fluid, malleable, and able to be influenced by the investing entity to benefit the company.
Both PE (Private Equity) and VC (Venture Capital) firms’ goals are the same: to increase the value of the business they invest in with the ultimate target of a sale of their equity stake, which will ideally yield a profit.
So, what is the difference between PE and VC investors?
Private Equity (PE) investment firms are traditionally more aligned with companies in High-Growth stages who are also in more traditional industries. When PE firms come in and invest, they usually want more than a 50% stake with the goal of rectifying inefficiencies or amplifying strengths they see in a company. Then, ultimately either selling their stake to other investors, taking that company to an IPO (Initial Public Offering), or in the private sector, cashing in on their investment. While the model of the Leveraged Buyout from a Private Equity Firm was the standard in the industry starting in the 1980s, the role of Private Equity has shifted, especially as the tech startup has dominated the investment capital world, thus encouraging more traditional PE firms to see the value and likelihood of success in younger markets.
Venture Capital (VC) investment firms tend to focus on Early-Stage startups. VC funding is rarely exchanged for more than a 50% stake in a company, VCs ask for a minority stake in a company in which they invest. Early-stage Venture Capital funding focuses on companies who are gaining traction in a market, have a concept but need funding to see it out, and have some level of proof of concept but not a long track record of success upon which to base their cap-raise ask. Venture Capital is invested in rounds, or series, designated by letters: Series A, B, C, etc… In the case of Early-Stage startups, they are most often in their Seed Round or Series A round of funding. The importance of your company’s series stage relates to the specific VC firms that will more likely be interested in investing. Finding the right PE and VC firms to pitch to is an integral element to address as you prepare to raise capital.
So, which is right for you? Private Equity or Venture Capital…
Likely, if you’re asking the question, this is the start of your journey and that would indicate that you are a startup. For companies that are more mature and are in high-growth stages, the CFO will already have insights into the private markets and will know that the company is seeking PE funds. So assuming you are in fact starting out and looking for Series A funding, VC investment will be the right area of focus for you.
How do you get VC firms to give you a look?
The process of acquiring your Series A funding is multi-faceted. Companies can rush into pitching VC and Private Equity firms before they have a good understanding of their level of funding-readiness. To optimize every interaction with a potential investor requires that leadership takes a cold hard look at where the company is, financially, operationally, and culturally. With a solid foundation of where your company currently is, it becomes much clearer to a potential investor how you will get where your pitch deck says you are going. At GrowthPath Partners, we guide our clients through a step-by-step process to ensure that they are ready for funding, clear on their vision, and rooted in the data to support a funding ask. Let’s review the process:
Perform an audit of your financials and processes. Taking a high-level look at the way you run your company and addressing inefficiencies and areas of weakness is essential to being able to address tough questions that investors will surely ask.
Perform a market analysis. What share of the market is available for growth? Is there enough potential for profit to entice an investor? If the potential market is $20 million in total, attracting an investor will be very difficult. If the potential market is in the $100’s of millions, there is a much greater upside for an investor and they are more likely to take a look.
Fix what you can fix and don’t shy away from the areas in which investment will allow you to amend weaknesses. This is where the rubber hits the road as you prep for funding. Fix what you can fix and start to clearly define your value proposition.
Build your pitch deck. Build it, and then scrap it, and build it again. A great pitch deck clearly outlines not only your value prop but also the market, the potential for profit, the company culture, and the “blue-sky” vision you have for the future.
Steps 5, 6, and more:
Line up your VC funding options and start to pitch! Being a founder is one skill, pitching to investors is quite something else. Get ready to answer tough questions and build relationships with the right VC investor. Be vulnerable, be honest, and be bold! And don’t be afraid to go back to the drawing board when you get tough feedback in a pitch meeting.
As your company addresses the right sources for your capital raise, don’t make the mistake of putting the cart before the horse and going to VC or PE investors unprepared. Remember, they have one goal: to make money. If you present in a way that shows attention to detail, forethought, and a process-driven approach to the business and the pitch, you will be far more likely to get the funding you need. If, on the other hand, you pitch before you have addressed your own internal issues, you may never be able to pitch to that investor again.