What is the difference between private equity and venture capital?

While both private equity and venture capital firms invest into businesses with the ultimate goal of seeing a return on their investment, private equity and venture capital operate in distinct and different ways.

Private equity firms target more established businesses and focus on mature companies that have already proven their business models, but are also positioned or structured in a way that they can benefit greatly from business optimization and other changes. The private equity firm buys a controlling stake in the company, crafts and executes a plan for expansion, and then sells their stake at increased value.

Venture capital tends to focus on early-stage companies like startups that have not yet developed into full viability. Venture capital investors will invest in a large number of startups all at once. These firms often know that each individual investment has a relatively high chance of failure but the goal is for one or two ventures to explode in value. Venture capital succeeds when just a few of their investments make up for the total sum of their many investments.

Do private equity firms only work with failing businesses?

Some private equity firms take failing businesses on a bust-to-boom arc of success, though for the most part they look for companies with a proven track record of success. Private equity firms often set goals of doubling and tripling the size of the business they invest in, and this is much easier when the businesses they select have healthy operations in place. 

Do private equity firms care about the company’s culture and values?

Private equity firms understand that long-term success is built on a positive culture. Investors also recognize that sustaining that positive culture can carry a company through fast-paced and stressful growth strategies. In many ways the presence of positive culture and values within a business is another indicator of the potential a business has for success.

Will private equity firms fire all of my managers and employees?

Successful businesses are built through the hard work, skills, and knowledge of a business’s workforce and private equity firms prefer to build on that success first and foremost. The workforce also carries with it institutional knowledge that is a necessary element to scaling up a business. Removing people can be counterproductive to an overall goal of growth. Simply put, private equity firms don’t see a return on investment when they strip a business of what has already made it successful.

Will I completely lose control of my business if I work with a private equity firm?

Business owners who don’t want to lose control over business operations can still find success when working with private equity firms. Private equity firms will only pull the trigger on an investment if they have confidence that they can work with the business itself, and if that means being fully transparent and agreement over who takes what role in business optimization. 

The reality is that there are a number of forms a PE investment can take, and this all depends on the goals of both the current owner and the PE firm. Some owners are looking for a full exit, and happily hand over a majority stake of ownership to the PE firm that then controls business operations. However, some PE firms buy a smaller share in the business and opt to keep the day-to-day operations of the business in the hands of existing management.

In this case, PE firms assume an advisory role. The PE firm provides specific strategies to achieve growth along a specified timeline while the business’s original management continues their work and reports back to the PE firm regularly on progress.

Do all private equity firms exit after five to seven years no matter what?

The five to seven year exit window is typical of private equity investments, though this should not be seen as absolute in all cases. PE firms will always have time-sensitive goals for growth in both the short- and long-term to keep a business on track and accountable, but the ultimate outcome of a partnership with a PE firm can result in various outcomes. 

Some PE firms prefer to invest, grow a business, and then sell once a return is certain after a certain number of years. But other PE firms create collaborative relationships with business owners that can last for a decade or more. Owners who are considering working with private equity firms should know ahead of time what kind of timeline they envision for their business and then work with a private equity firm that is willing to match that vision.