Wednesday, February 16, 2011

Investment by way of private equity or venture capital

When a small business is looking to grow itself, the best way for it to do so is to either opt for private equity investment or look at venture capital firms. Both have their own benefits and downsides, and these should be taken into account when looking to secure either. Getting the wrong one for your business situation could be disastrous, so do your homework before stepping out with your big plans in hand. The one similarity private equity investment and venture capital firms share is that venture capital is invested as equity as well, and both are invested in businesses with high growth potential.

Both look to try and get hold of companies with solid future prospects and they also look for management teams that are capable of envisioning and then carrying out a proper business plan. There are fundamental differences to be found between the two vehicles of investment though. Historically, venture capitalists have been earlier to get onto the bandwagon while private equity only really comes into play down the line, like a second wave of attack. Private equity is more often than not offered to companies that are far further along in their life cycle as compared to venture capital offerings.

But venture capital firms take their pound of flesh for stepping in so early in the process; they will make businesses jump through more hurdles and be more cutthroat in their valuations of businesses. They might place restrictions on business in the way they can be managed while private equity firms will try to have less of a say by way of comparison. These are the technicalities that everyone will dish out when asked about private equity investment and venture capitalists, but competition has served to make this divide very unclear.

If anything, the boundaries between two investment classes have now been blurred thanks to robust competition. With capital markets as active as they are today, there is a lot of capital that is after some very lucrative businesses. And so it is that investors no longer hold all the aces. There is so much pressure on money managers, investment advisors, fund managers and capital providers to invest that never before deals are now being cracked. Money supply has suddenly come along in a gush and it has created sever competition from investors, all of this resulting in crazy valuations (by businesses) and lower yields (for investors).

This competition has now seen private equity firms try to catch companies earlier in the corporate life cycle while venture capitalists have now softened their demands. As an entrepreneur, this is a fantastic situation to be in and you should look at all your options before settling on any one source of capital. 

Desc: When a small business is looking to grow itself, the best way for it to do so is to either opt for private equity investment or look at venture capital firms.

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1 comment:

  1. very nice post,useful or helpful for the business looking growth..

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