There are some major differences between venture capital and private equity investing, and one of the most important is the level of people involved. Unlike venture capital firms, private equity firms do not have to engage in the same level of management, focusing only on financial decisions. Instead, they must work out the numbers to make the business work. Despite these differences, both venture capital and private equity have become increasingly popular over the past few years. In fact, the amount of capital invested annually rose more than 13 times between 2010 and 2019, topping $160 billion annually.
VC firms invest at earlier stages in the startup lifecycle
Most VC firms invest at the early stage, or “series A” of the startup lifecycle. These funds are used to grow the company from a concept to a profit-generating business. Investors typically seek companies with a realistic timeline, and often look for those with a proven technology or solid business strategy. Angel investors prefer to invest in early stages because they have less influence over the startup’s future than VC firms do.
VC firms collect management fees from limited partners
VC firms collect management fees from limited partners. These fees are capped at a fixed amount, often called a management fee. LPs have the right to reject a particular rate of return and may insist on rate steps down. By doing this, they are effectively granting the VCs a free loan, hoping to recoup the original fees later. This process, called recycling, does not decrease the LPs’ management fees, but merely delays them.
VC firms are more relaxed and easy-going than PE firms
VCs operate in a different world than PE firms. They have a different set of rules, but the general rule is that VCs invest in startups that are either too early or too late. Their portfolios should be a minimum of 50 companies. A typical VC fund will invest in only 20 companies, so doubling the average would improve the industry’s performance. PE firms will invest in 50 to 100 companies, but most VC funds are focused on less than twenty.
VC firms invest at a minority stake
VC firms work in many industries. They can be categorized into two general groups: associates and principals. Associates generally come with experience in finance or business consulting. They perform more analytical tasks and introduce prospects to the firm. Principals are more involved in the operations of the portfolio companies. Partners are more hands-on, focusing on the acquisition process and identifying new investment opportunities. However, it is possible to work at both levels.
VC firms provide growth capital
Venture capitalists (VCs) invest in companies seeking growth capital, and typically take a majority stake in the company in exchange for equity. These investments usually take the form of equity in the company, which ideally takes the form of a substantial minority interest. Growth investments are very different from buyouts, since the investors take part in the company’s growth rather than simply providing capital for management. The VC firms generally use a variety of different documents when investing in a company.