Private Equity vs. Venture Capital

What is the difference between venture capital and private equity?

The textbook answer most B-School professors would give is that venture capital is a subset of a larger private equity asset class that includes venture capital, LBOs, MBOs, MBIs, bridge and mezzanine investments. Historically, venture capital investors have provided high-risk equity to start-ups and early-stage companies, while private equity firms have provided secondary tranches of equity and mezzanine investments to companies that are more mature in their corporate lifecycle. Again, venture capital firms have traditionally had higher hurdle rate expectations, will be more greedy in their valuations, and will weigh more on their management constraints than private equity firms.

While the above descriptions are technically correct and have largely been true from a historical perspective, increased competition in capital markets over the past 18 to 24 months has blurred the lines between venture capital and private equity investing. Given the robust, if not seething, state of capital markets today, there is far too much capital chasing too few high-quality transactions. The increased pressure on the part of asset managers, investment advisors, fund managers and investors to place funds is higher than ever before. This excess money supply has led to more competition among investors, driving up valuations for entrepreneurs and lowering returns for investors.

This increased competition among investors has forced both venture capital and private equity firms to broaden their respective horizons to continue to seize new opportunities. Over the past 12 months, I’ve seen an increase in private equity firms willing to consider early-stage companies and venture capital firms that are lowering return requirements to be more competitive in securing later-stage opportunities .

The moral of this story is that as an entrepreneur looking for investment capital, you have good timing. While the traditional rules of thumb outlined first above can be used as a basic guide to determining investor suitability, don’t let traditional guidelines prevent you from exploring all types of investors. While some of the ground rules may change, your capital formation goals should remain the same: entertain suggestions from venture capitalists, private equity firms, hedge funds, and angel investors while attempting to work across the capital structure to achieve the highest valuation possible the lowest mixed cost of capital with the greatest control.