Private Equity or Venture Capital for Growth?

Small businesses poised to grow may consider the alternatives to debt financing for investment. Private equity or venture capital are viable options to traditional debt and grant funding. What are the differences between the two types of investors that business owners need to know?

Venture Capital and Small Businesses

Hollywood makes venture capital (VC) seem like the "cool kid" investors only interested in dealing with the hottest, high-flying tech disruptors. The word "venture" in its name, gives us a clue about VC: They invest in bold ideas. Practically speaking, a VC investor provides capital in exchange for equity.

How much you can raise or the deal size depends on your company's stage. Are you pre-revenue or profitable? Your business type and market also matter to VC investors. In the early or startup days, before a company has revenue or customers, an investment of $250,000 to $1 million is possible. Later-stage startups that need to expand their market share and outperform competitors could receive $5 million to $20 million.

The important thing to remember is that it's hard to know how much capital it will take to become successful. Creating enough value to clear the valuation hurdle or the minimum acceptable rate of return is crucial to a company's growth.

In this economy, are VCs making deals? The Q3 2022 deal value is $81 billion. It seems there are venture capitalists looking for equity in a profitable small business ready to grow.

Private Equity Alternative

Companies that are not publicly listed are the target of private equity (PE) mergers and acquisitions (M&A) that business headlines make so much about. However, you don't have to be a private company to attract PE. They also use buyouts to take part or all of a company off the exchange. What makes PE an alternative to VC funding for your business?

A main difference between VC and PE investment is the level of involvement in a portfolio company from the general partners of a PE firm (or fund). A business gets capital and a deep bench of expertise in all areas of business, including operations, finance, board relations and transformation from a PE investment. In reality, a PE firm doesn't just invest, it provides a potentially profitable exit for shareholders, especially companies in need of a turnaround strategy. 

A PE firm or fund invests for limited partners or private investors, including wealthy families, pension funds, endowments and other institutional investors. PE dealmaking values hit $486 billion in the first part of the year. The monthly average is 53 deals worth $100 million. According to EY Private Equity Pulse, PE firms have increased their interest in growth and expansion deals. That is an opportunity for business owners to find investment needed to expand the company and exit on potentially better terms.

Contact us for mergers and acquisition advisory online or at 866-696-2033 to schedule a consultation.

Categorised in: Starting a Business in Arizona

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