Private Equity is a term that has two common meanings: (1) as an asset class, which covers strategies such as venture capital, growth equity, buyouts, mezzanine financings and distressed debt; and (2) as a transaction type, where it really means buyouts.
There is often some confusion between venture capital, growth equity and buyouts, and this post explores the similarities and differences between venture capital and emerging equity. More specifically, this post will explore the difference between early stage venture capital and growth equity. Venture capital itself has a number of stages, from seed, to early-stage, to late-stage financings. By comparing early-stage venture capital to growth equity, the differences are more clear and understandable.
There is often some confusion between venture capital, growth equity and buyouts, and this post explores the similarities and differences between venture capital and emerging equity. More specifically, this post will explore the difference between early stage venture capital and growth equity. Venture capital itself has a number of stages, from seed, to early-stage, to late-stage financings. By comparing early-stage venture capital to growth equity, the differences are more clear and understandable.
Early-Stage Venture Capital
Growth Equity
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- Investment in privately-held start-up or early-stage companies
- Companies have high level of risk (market risk, technology risk, funding risk, management risk, etc.)
- Innovation is a key element of the investment thesis
- Key sectors include TMT (technology, media, telecommunications), healthcare/life sciences, consumer
- Invested capital used to develop product/technology
- Minority (non-control) investment
- No leverage used in the investment transaction
- Investment size is hundreds of thousands of dollars to millions of dollars
- Companies typically have no revenue
- Companies are very cash-flow negative
- High risk of company failure
- Investment returns are due to significant growth in addressable market and significant growth in company market share (the combination of which leads to dramatic revenue growth)
- Typical exits are sales to a strategic (corporate) buyer (the vast majority of exits are this way) and IPOs
- Early-stage venture investors include Sequoia, Accel Partners, Andreessen Horowitz, Kleiner Perkins, Khosla Ventures
Growth Equity
- Investment in privately-held mature operating company (can also be a purchase of existing shareholder holdings to provide founder liquidity)
- Company may be founder owned and operated with little to no prior insititional investment
- Companies have lower levels of risk (usually no market or technology risk, low or no funding risk, but management risk always remains
- Innovation is not usually a key element of the investment thesis (the innovation has been proven at this stage)
- Sectors are much broader than venture
- Invested capital used for growing revenues (sales and marketing), additionial product development and scaling the business
- Minority (non-control) investment
- No leverage used in the investment transaction
- Investment size can be from tens of millions of dollars to hundreds of millions of dollars
- Companies typically have meaningful revenues ($25 - $100 million or more)
- Companies are cash flow positive or trending that way
- Lower risk of company failure
- Investment returns are due to growth in revenue and cash flows
- Exits include sales to a strategic or financial buyer, or via an IPO
- Growth investors include TCV (Technology Crossover Ventures), TA Associates, Summit Partners, NEA (New Enterprise Associates)
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