Private equity and venture capital provide ways for business owners to obtain funding to run or develop their companies. Private equity is capital invested in a company that is not publicly listed or traded, while venture capital is funding provided to startups that exhibit strong potential for long-term growth.
- Private Equity: private equity funds invest and obtain equity ownership in private companies, generally those in high growth stages or which are underperforming. Private equity firms do not hold investments in publicly traded companies i.e. companies listed on the stock exchange.
- Venture Capital: venture capital is a subset of private equity, and it refers to investments made in startups with little or no track record of profitability. Venture capital generally concentrates on sourcing, identifying, and investing in what they believe will succeed and bring huge returns. Venture capital is a means of providing long-term equity funding to new, fast-growing companies. It is sometimes called “private equity investment”. There are three primary types of private equity transactions – startup venture capital, development capital, and buyouts.
In other words, venture capital is an alternative to long-term financing, and the business risk is divided through a partnership between the investment fund managers (General Partners) and the entrepreneurs (business owners).
Investment fund managers (General Partners) and entrepreneurs
The partnership between investment fund managers (they are responsible for Seed Capital, Venture Capital, and Private Equity funds), and entrepreneurs (they have businesses at various stages of maturity and are looking for capital and experience to ensure the growth of the businesses) is highly beneficial to businesses and will support these businesses at all stages of development, from Seed Capital ( this is aimed at business structuring), passing through the Venture Capital stage (to aid the expansion of businesses that already have notable gains), and going as far as Private Equity, which funds businesses that are already well-developed.
The stages of investment
Most successful companies follow a comparable pattern of growth. They pass through various phases of development and each phase requires financing of a different size and structure. These types of financing generally involve the following:
- Seed: this stage refers to when the business idea is conceived and the initial concept of the business is formed. The project will be funded by the entrepreneur’s resources.
- Startup/Development: the service or product of the business is produced at this stage, but it has not been sold commercially. Investment in fixed assets and equipment for commercial production is now essential.
- Expansion: at this stage, the company is now growing quickly and is branching out to new markets, it may need a series of fundraising.
- Mezzanine: the company has now established a track record over a few years with a trend for prolonged success. In preparing for listing on the stock exchange, there may be a necessity to restructure and strengthen its balance sheet. At the same time, authorization by a reputable venture capital firm will entice greater investor interest.
- Buyouts: a buyout is the acquisition of control over a business through the purchase of shares or the assets and trading liabilities of the business. In a buyout, the venture capitalists will own most of the share capital and have strategic control over the company, while leaving the day-to-day operations to management.
In addition to helping in risk management, reducing the likelihood of failure, and providing favorable financing options, venture capital also provides long-term support in several areas and networking opportunities.
Funding is essential for entrepreneurs and start-ups and for companies looking to accelerate their business. Venture Capital and Private Equity are some of the ways to get this funding.
In respect of this, Damalion can provide venture capital services to help your business find investors and can help venture funds develop portfolio companies. Just contact your Damalion expert now to get started.
