In the world of private market investing, two terms stand out: venture capital and private equity. While both fall under the umbrella of alternative investments, these two approaches to financing private businesses are distinct in their return goals, methods, and the types of companies they target. Investors looking into private market opportunities should understand the key characteristics of both venture capital and private equity.
Venture Capital: Fueling Early-Stage Innovation and Startups
Venture Capital (VC) is often synonymous with early innovation and startup entrepreneurialism. VC firms provide funding to early-stage companies that exhibit high growth potential, often in exchange for equity ownership in the company. Here are some essential characteristics of Venture Capital:
Stage of Investment: VC firms primarily focus on early to mid-stage companies. These startups are typically early in their lifecycle, potentially with unproven business models and products or services that have not yet gained significant traction in the market.
Risk Tolerance: Venture capitalists are known for their high tolerance for risk. They understand that many startups fail, but they are willing to take calculated risks in pursuit of outsized returns. For many venture capital portfolios, the returns from a few “home run” investments can often drive returns for the whole portfolio, even in the case of liquidations or bankruptcies of other investments.
Investment Size: VC investments are generally smaller compared to private equity. They usually range from a few hundred thousand dollars to several million dollars, although larger funding rounds can occur. As companies stay private longer, Venture Capital investments have also grown for later-stage companies.
Active Involvement: VC firms often provide more than just capital. They offer guidance, talent sourcing, business development support, and more to help startups navigate the challenges of building a successful business. Often, these support resources are what helps differentiate one venture capital firm from another.
Investor Profile: VC investors tend to be large institutions like family offices, pensions, endowments, or foundations. At a minimum, investors tend to be the ultra wealthy who can write a $1M+ check into an investment vehicle.
Exit Strategy: Venture capitalists typically aim for an exit within six years. They seek returns through either an initial public offering (IPO) or acquisition by a larger company. However, as companies stay private longer, VC firms may hold these investments for 10+ years or seek to sell their shares in the private secondary market before an exit event.
Private Equity: Maximizing Value in Established Companies
Private Equity (PE), on the other hand, takes a different approach to investing. PE firms invest in established private companies with the goal of improving operations, increasing profitability, and ultimately maximizing the value of the business. Here are the key features of private equity:
Stage of Investment: Private Equity firms primarily target mature companies that may be experiencing operational inefficiencies, facing succession challenges, or requiring capital for expansion or restructuring.
Risk Tolerance: PE firms are generally more risk-averse than venture capitalists. They seek stable and predictable cash flows and are less inclined to invest in highly speculative ventures.
Investment Size: Private Equity investments are typically much larger than VC investments and can range from tens of millions to billions of dollars, depending on the size and complexity of the target company. These investments are often referred to as growth equity rounds.
Active Involvement: Private Equity firms often take a hands-on approach to managing their portfolio companies. They bring in experienced executives and industry experts to drive operational improvements.
Investor Profile: Similar to venture capital, Private Equity investors tend to be large institutions like family offices, pensions, endowments, or foundations. At a minimum, investors tend to be the ultra wealthy who can write a $1M+ check into an investment vehicle.
Exit Strategy: Private Equity investors have a longer investment horizon, often spanning five to ten years or more. Their exit strategies commonly involve selling the company to another business or taking it public, similar to venture capital.
With companies staying private for up to 11+ years, the line between Venture Capital and Private Equity has blurred. More Venture Capital investors are continuing to back their portfolio companies well into their late stages, while some Private Equity investors are now investing at earlier stages as well.
At EquityZen, we offer investments in late-stage, venture backed companies. We consider this the sweet-spot between early-stage, venture-backed and later-stage Private Equity investing. Our marketplace focuses on companies that meet the following criteria:
- Companies that have typically already raised at least a Series B round of financing or $50M or more in funding from top-tier venture capitalists
- Companies that are achieving significant revenue growth and have a proven out business model
- Companies that are likely 2-5 years away from an exit.
EquityZen’s marketplace offers investments in companies across industries like artificial intelligence, enterprise software, fintech, biotech, and more, with a focus on technology-driven businesses. These companies may eventually raise capital from private equity investors, but most raise venture capital with the goal of exiting via an M&A event or IPO.
While Venture Capital & Private Equity investment opportunities have historically only been available to institutions and the ultra wealthy, EquityZen is committed to changing this. We believe all investors should be able to benefit from the value creation happening in the private markets so we offer investment minimums as low as $10,000 to accredited investors. In fact, we’ve enabled over 600,000 individuals to access the private markets via the EquityZen platform. It’s one of the many things we have done towards our mission of creating “Private Markets for the Public”.
By understanding the different opportunities available to invest in private companies, investors can navigate the private market more effectively and ultimately choose the investments that best meet their portfolio’s diversification and growth needs. With so much growth and innovation happening in the private markets, we believe Venture Capital and Private Equity will become essential parts of a diversified investment portfolio.
Disclaimer: An investment through EquityZen's platform will involve risks not associated with other investment alternatives. Prospective investors should carefully consider, among other factors, the risks described here.