VC Industry Overview
Venture capital money is invested in young, rapidly growing companies that have the potential to develop into significant economic contributors; an important source of equity for start-up companies.
Professionally managed venture capital firms generally are private partnerships or closely-held corporations funded by private and public pension funds, endowment funds, foundations, corporations, wealthy individuals, foreign investors, and the venture capitalists themselves.
Venture capitalists generally:
- Finance new and rapidly growing companies;
- Purchase equity securities;
- Assist in the development of new products or services;
- Add value to the company through active participation;
- Take higher risks with the expectation of higher rewards;
- Have a long-term orientation
What is Private Equity?
Value: A Primer on Private Equity (Private Equity Council)
Explores the contributions that private equity investment firms make to the global economy and detail the manner in which private equity firms strengthen companies and deliver superior returns to their investors.
Guide on Private Equity and Venture Capital for Entrepreneurs (European PE & VC Association)
Provides comprehensive insights into the PE/VC business model and investment process; includes description of relationship between the entrepreneur and PE fund managers, the stages towards an eventual agreement, the follow-up and exit from an investment; and how funds are structured.
Private equity refers to any type of equity investment in an assest in which the equity is not freely tradeable on a public stock market. Passive institutional investors may invest in private equity funds, which are in turn used by private equity firms for investment in target companies. Private equity firms generaly receive a return on their investment through one of three ways:
- an initial public offerings
- sale or merger of the company they control
Unlisted securities may be sold directly to investors by the company (called a private offering) or to a private equity fund, which polls contributions from saller investors to create a capital pool. Private equity funds typiclly control management of the companies in which they invest, and often bring in new management teams that focus on making the company more valuable.
Types of Investments
The four major sub-asset classes within private equity are:
- Venture Capital – the investment in companies either in their early-stage, when the capital is used for product development, or later-stage, when companies have started to generate revenue and expect to become profitable in the near future.
- Buyout & Acquisition Financing - the acquisition of a company's assets and operations through the purchase of a controlling equity interest in the company. The transaction usually includes a revised business plan and management structure designed to improve the company's financial performance.
- Expansion Capital - the investment in established companies to provide them with the capital needed to enter new markets or expand operations.
- Mezzanine Debt Financing - the use of subordinated debt and equity to finance a company just prior to an initial public offering (IPO).