What is Private Equity Finance?

Private equity finance and capital comes from private equity investment firms.  Large amounts of money are raised and collected from individual and institutional investors.  The money is then pooled into a fund that is used to invest in new business ventures.  The private equity investment firm decides on specific objectives on how to invest their funds in new or emerging businesses in need of capital.

Private equity financing is sought when other forms of financing is not available or difficult to acquire.  Banks require assets to collateralize a loan, and startups usually have little or no assets.  Individual partners and investors are difficult to organize because the business concept is yet unproven at the startup stage.  Thus, private equity financing is there to help new businesses with great ideas succeed.

Private Equity Finance vs. Venture Capital

A venture capital firm is an example of a private equity investment firm.  However, venture capital specifically refers to the acquisition and development of new and risky businesses with high growth potential.  Venture capital amounts usually start at no less than $3 million.  New businesses are expected to turn around significant profits or go public with a stock offering usually within five to seven years.

Private equity investment firms, however, encompass a larger spectrum of assets classes and equity securities, including venture capital, as well as leveraged buyouts, distressed buyouts, mezzanine and secondary capital, and growth capital. 

Additionally, private equity investment firms may choose to invest smaller amounts in startup businesses.  Private equity finance in the amounts of $50,000 to $500,000 is not uncommon.  With smaller amounts of capital doled out, private equity investment firms are able to help and grow more than 25 times the number of businesses than venture capital firms.

Sources of Private Equity Finance

Whether the creative entrepreneur needs capital to conduct market research, seed money for product development, or beginning stage financing to penetrate a specific market, private equity finance is one of the best options for funding.  However, where can the creative entrepreneur go to find private equity financing?

Usually, an entrepreneur goes directly to a private equity investment firm with a proposal for capital.  Most can be found online, and a wise entrepreneur will utilize a private equity investment firm database that contains lists of firms with varying specialties.  To maximize your chances of funding success, find private equity investment firms that tend to specialize in your specific industry. 

Brokers may also be a good way to target a private equity investment firm.  A broker in this industry has years of experience and numerous contacts and is able to help direct the entrepreneur in need of capital to the right firm.  Though fees are hefty for this service, it may be worth the cost to target the major players and get the right private equity financing.

Whether large or small amounts of financing is needed for capital growth, entrepreneurs and business owners can find their special financing needs through private equity investment firms.

Investment venture capital is a source of funding through firms who specialize in acquiring private equity funds from investors.  SMEs with the potential for large market growth or going public with an IPO are prime candidates for receiving investment venture capital.

Though it is one of the best sources for seed and startup financing, acquiring investment venture capital, however, is not easy.  Usually only 2% to 5% of all proposals are chosen as investment candidates.  Is there a way for a SME business to have an advantage over other applicants?

Tips for Approaching Venture Capital Investors

One of the biggest ways to build an advantage as an investment venture capital applicant is to thoroughly read and understand each firm’s application procedures and guidelines.  Too many entrepreneurs and SME business owners distribute carbon copies of their capital proposals to every venture capital investor on the list, hoping that one will “stick.”  However, these applicants are usually summarily rejected because they did not follow particular application instructions. 

Here are other ways that SMEs can gain advantage when approaching venture capital investors:

• Though venture capital financing is about assessing the future success of a business, crystal ball guesses and speculations have no place in a proposal.  Always use accurate facts and figures, as well as solid data to back up your projections.
• Research potential venture capital investors before applying.  It wastes your time and the firm’s time if you apply for SME financing for your new software business to a venture capital investment firm specializing in medical technology.  Form a short list of viable firms before sending out proposals.
• The management team is the key.  Venture capital investors invest in quality teams with breadth and depth of experience and expertise in management areas such as marketing, production, sales, etc.  Make sure to assemble a management team who possesses the confidence and know-how in their specialty.  Managers with previous startup experience are also a plus.
• Prepare a succinct presentation.  When you get the chance to go before a group of venture capital investors, remember they have probably listened to hundreds of other proposals just like yours.  Make yours brief, about 15 minutes, and include clear highlights of all necessary details from your business plan.  Practice your presentation before doing it live.
• Be ready to answer questions.  Interested venture capital investors are curious, and they are not afraid to ask the tough questions.  Be prepared to provide clear answers about weaknesses, competition, sales figures, etc.   Understanding your weaknesses and articulating them shows your keen business acumen, as well as the fact that you have carefully studied the industry. 

A SME business with a viable product or service can get their foot in the door with investment venture capital.  However, it takes grueling work to acquire the necessary research, facts, and figures needed to convince venture capital investors that the SME will experience high-growth success.

However, if your startup is poised for high growth, private venture capital firms are ready to help give you the funds you need to make your business dreams a reality.

What is Private Venture Capital?

Private venture capital is a source of funding for qualified entrepreneurs who have an innovative idea for a startup endeavor.  Private venture capital is usually derived from private sources, or investors, who contribute money into a venture capital fund.  The firm then decides how it wants to distribute private venture capital funds into certain types of startup businesses, such as high tech, software, or medical technology. 

Since startups and new businesses are yet unproven and a risky investment, private venture capital funds have a strict approval process.  Only the most organized businesses with the best ideas and the most qualified group of leaders usually make the cut. 

How Private Venture Capital Firms Can Help

New startups with a firm business plan and reasonable financial projections can get plenty of help from a private venture capital firm.  There are two major ways that private venture capital firms can get a startup going strong and successful:

• Invest Capital – Money is the lifeline of business.  New businesses, especially in industries with high barriers to entry, need funding to grow.  Private venture capital firms are not looking to invest a few hundred thousand dollars to help a business.  Rather, they are expecting to help new startups with capital injections in the millions of dollars.  Private venture capital amounts of $5 million to $20 million are not uncommon.  Generally, any startup that needs less than $3 million should look to angel investors, not venture capitalists. 
• Provide Helpful Expertise and Guidance – Private venture capital firms are in the business of helping new companies succeed.  In addition to funding, venture capital firms will take roles within the particular organization, such as sitting on the board of directors.  A private venture capital firm may assist with important issues such as marketing plans, market research, R & D, and IPO.

What Do Startups Give Up For Private Venture Capital?

Because of the high risk involved with startups, private venture capital does not come without a high cost.  It is not uncommon for private venture capital firms to require an ownership interest of 30%, 50%, and even a majority partner interest in a startup.  A startup can also bet that along with a large ownership interest in the business, private venture capital firms will also require to be involved in all major business decisions – meaning that a degree of control must be relinquished. 

In addition, along with a large ownership interest, a private venture capital firm will have first rights on any purchase of common stock and preferred stock if a startup has plans to go public with an IPO. 

Entrepreneurs and startups with a firm grasp on the reality of their future business success can realize their dreams through private venture capital.  Though this type of business financing may come with a cost, it is one of the best routes for new businesses to find their ultimate success.

Typically, investment venture capital is a high risk game for the investor since it normally involves backing either a start-up or relatively under developed small business that is either looking to expand or to move into another direction. However, this form of investment does have its rewards that being a high return on the initial outlay – and of course you would expect that, given such a high risk of your money being lost.

Investment venture capital can usually include some form of management or technical exchange of expertise along with the cash investment. If you have ever watched Dragons Den, a UK private venture capital television series will appreciate just the sort of expertise that comes with secured investment. This sort of assistance and advice doens’t come without a premium price though, especially if you are looking for a high investment. You may be forced to give away, 30% perhaps even 50% of your business in exchange for the investment you require.

Investment venture capital is perfect for smaller businesses that are looking to grow but who have limited options to secure professional investment. They therefore look for an individual investor or they look for corporate venture capital who are in the same line of business. For example, a small innovative Internet company simply would not have the background or reputability for a high value loan which is necessary, especially in the technology field. These small business then have to look elsewhere to secure reliable investment for their business.

Someone who understands Internet technology may believe that this small company may be onto something and is willing to participate in investment capital venture by purchasing part of the company. In turn the company now has the funds that the loan would not permit. Someone like Bill Gates would be the perfect example of a person who may involve himself in a investment capital venture. Nevertheless, it does not just have to be an individual.

This small company may solicit Yahoo! who may believe that over time this company may prove to be very successful. They may participate in a corporate venture capital deal where the company, Yahoo! in this instance buys a share of the company hoping for a major return on their investment venture capital several months, perhaps years after investment.

The reasons why these small companies need investment venture capital is because they are deemed as high risk companies. At any moment they may go under because they are not fully established. Therefore the person investing is assuming a huge risk. Nevertheless, this person after investing actually then becomes largely involved in the decision making of the company, the ownership of the company and the value that the company possesses which is where the turn around investment comes from.

Investment venture capital is a small companies best option unless it wants to maintain its full individuality and not usurp its power to its investors. However, it is very easy to become knocked out of the competition by larger opponents. With the financial security of corporate venture capital and investment venture capital made by an individual, there is a more likeliness of a more successful survivor rate for the small company and a larger and more prosperous return rate for the investor.