Monday, December 19, 2022

What's the difference between Venture Capital and Private Equity?







Stages of Investment in a venture


➡️ Angel: Individuals - fools, family and friends 
➡️ Seed: 1st institutional funding
➡️ Growth: Series A - C
➡️ Late Stage or Crossover: C through IPO
➡️ Buyout: Majority control, Debt

Often levels crossover 

➡️ Angels - Preseed


They may be fools, families, friends, or former colleagues of the founders.

Seed or angel investors are typically entrepreneurs who founded their own companies and had successful exits.  

Their main skillset is understanding the role of the entrepreneur in the business, and they often have very specific product knowledge.

Often funding startups and ideas 

They usually invest when a company is trying to go from PowerPoint to reality.

-Check Size: $10K to $250K
-Holding Period: 8 to 10 years
-Target Return: >75% IRR or +10x

Angels and seed investors focus more on qualitative factors such as who the founders are, high-level reasons why the business should be a big success, and ideas about product-market fit.


  • Y Combinato , Boom Startup, Maven Ventures, Jeff Bezos , Marissa Mayer, your mum and dad 

➡️ Seed


Seed-stage investors are when VCs look to invest 


Investment teams are often a mix of entrepreneurs and ex-investment bankers or other types of finance professionals.

VCs are also very focused on who the founders are, but usually by this stage, more concrete metrics are available to consider, such as revenue run rate, average revenue per user, customer lifetime value, margins, etc.


Capital is typically used for market research, product development and business expansion.

At this stage, the first full-time sales and marketing people are usually hired.

-Investment : $250K to $2M
-Holding Period: 6 to 8 years
-Target Return: >60% IRR or +10x

Investors 

Oak Investment Partners
VantagePoint
Highland Capital Partners
Greylock Partners
Google Ventures
Andreessen Horowitz
Square Peg
Blackbird

 

➡️ Growth


Growth investors typically participate in Series A, B, and C rounds.

Private equity firms are typically more weighted towards ex-investment bankers and corporate development types, or experienced corporate operators.


PE firms look at key financial metrics, including EBITDA, cash flow, free cash flow, and, ultimately, what IRR they believe they can achieve.



They pour fuel on the fire once product-market fit is established and are looking to a scale Up

This is when a company is scaling its go-to-market engine for exponential growth.

-Investment : $5M to $50M
-Holding Period: 5 to 7 years
-Target Return: >40% IRR or +7x

Investors include 
The Carlyle Group
Kohlberg
 Kravis Roberts (KKR)
The Blackstone Group
Apollo Global Management

➡️ Late Stage / Cross Over


Companies look to show efficient growth, marching towards a sustainable long-term financial profile.

Proceeds may be used to go from single to multi-product and expand sales internationally.

Investors often build starter positions to go bigger at IPO.

-Investment : $20M - $150M
-Holding Period: <5 years
-Target Return: 25 to 35% IRR or +5x

➡️ Buyout


This is when you buy the entire thing, usually using debt, to make it more efficient and flip it later.

Flavors include LBOs (leveraged buyouts), Take Privates, Rollups, Platforms and HoldCos.

Free cash flow is usually needed to pay down debt, which is prevalent.

-Investment : Depends on strategy, could be hundreds of thousands to billions (see: Anaplan, Sailpoint, ForgeRock)
-Holding Period: 3 to 5 years
-Target Return: >18% IRR or +3x

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