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.

As you get more comfortable with your bank, over time it can actually lead to problems with saving money. While you may be really interested in rates and fees when you first opened your savings account, after a period of time you’ll probably stop thinking about it.

Now is a great time to revisit your bank and see how much you are now paying to maintain your savings account. Have the fees risen over the years? Do you even know what the fees are these days? If you don’t, start asking. If you find that you are not happy with the changes that have taken place, it is time to make some changes of your own.

Start first with your current bank. Let them know you aren’t pleased with the current cost of your savings account and discuss other options you have to cut down on expenses associated with your account. Your bank may be willing to work with you in the interest of keeping a loyal customers. Those that don’t wish to hang on to your business will likely be harder to convince. But, that’s okay too because you do have choices. It is now time to shop around.

The internet is a great place to check out and compare the best savings accounts that are available and that fit your financial life. Look at the fees associated with the account maintenance each month, how much in interest you can earn, and what the limits are required to keep an account open. You may find that the bank down the street has the best deal for your situation now but you may also find that an online savings account can earn you better interest and provide services traditional banks do not.

Your savings plan should help you build up cash for the future not take away from your efforts by deducting outrageous fees on a monthly basis. Don’t be afraid to walk away from your current bank in search of a better deal. After all, it is your money to protect.

Business Angel Investors usually invest their own funds and enable start-ups to gain reliable and almost always experienced and professional seed funding and venture capital. Quite often, venture capital angels fill the void for high-growth start-ups who although have a great deal of risk, have a high return on their original investment.

Although Business Angel Investors demand a lot from any company that they invest in and are often referred to as greedy, overwhelming individuals, they can provide extremely secure investment and sound advice if required to do so. You won’t find this sort of personal touch from a bank or investment group. This is why business angel investors and venture capital angels are the preferred choice for many start-ups looking for early funding.

You may well: Ask how do I know if I have an idea that will impress or even interest a private venture capitalist? Well the chances are if you are considering the route of private venture capital, you’ve got a pretty sound idea of why you need the capital. The chances are that you have also considered the regular routes of finance such as bank loans, family & friends and so forth but have come back with nothing. A lot of private venture capitalists will listen to you or at least put you through some sort of selection process to consider your idea for investment. If you’re confident in it – give it a go!

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.

Not only will entrepreneurs who invest poorly lose the investment in the company that they choose to promote, but then they are also held accountable for the enterprise venture capital investments that they borrowed. Working with equity venture capital may be risky as the business that the entrepreneur is looking to invest in must be at a moderately stable period of its corporate life. If it is not, many entrepreneurs invest in enterprise venture capital that are willing to work with higher risk investments in smaller companies.

Nevertheless, entrepreneurs do a lot of good in the business world and even find great business opportunities for venture capitalists and private equity firms to invest in. The job of an entrepreneur is to find the next booming market or product in the market, invest in it and make it grow. They do not simply just ask for funds and inactively take part in the company. They actually have a major part in the new business.

Such activities that these entrepreneurs take part in due to the enterprise capital venture investments is that they create more jobs in the business, present new ideas and introduce new technologies to the company and to the public. They also think out of the box to manifest new ways to create products and if that means changing the re-courses and develop entirely new types of money making markets, that is what will be done.

Therefore, if an entrepreneur is interested in your small company these are the types of ideas and jobs that he or she will be undertaking as a result of investing in the small company by way of the financial support that roots from either equity venture capital investments or enterprise venture capital financing. Either way these investments are high risk for everyone, the business, the entrepreneur and the investment financiers.

Venture private equity consists principally of private funding for companies just like in private venture capital except who the fund is the fundamental difference between the two investors. Venture private equity has a long reputation of only investing in companies that show a bit more security than the high risk businesses that venture capitalists invest in. Venture private equity investors normally choose to invest in those companies that are entering their later corporate stages.

Nevertheless, trends are always changing and so to is how investors think and want to spend their money. Therefore you will start to notice that these traditional private venture capital investors investing in high risk companies are beginning to open their scope by looking into and investing in more mature companies. Likewise, venture private equity sources are beginning to lower their requirements as to what it means to be a mature smaller company. So you will now notice that the more risky businesses are receiving financial back up from venture private equity investors.

Therefore a small company with little financial history that is denied a financial loan from a bank for being considered high risk may turn to a private venture capital firm for the funds. However, due to the competition between private venture capital firms and investors and venture private equity investors and firms, this small company in its early corporate life cycle can open its options for financing to a private equity firm as they may be highly considered regardless their high risk status.

Likewise a company that is venturing into its latter part of corporate life, proving to be financially sound and that the chances of prosperity are high, can look at private venture capital investments as they may be considered for financing. Depending on the small companies preferences and the interested parties, this will determine who ends up financing the small company.

With this said, it is quite apparent that the pressure is on these investors and not on the companies. Although they may be denied for the traditional route of high risk companies being invested only by venture capitalists while more mature companies are invested by private equity firms, the likeliness nowadays is that there is pressure for both parties to find the best investments to make a profit regardless of the companies stature in the business world. This gives small business owners a relief that financing for a good small company may come much easier and the options are now open as to where they can find financing rather than being confined by traditional business models.

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.