jbdcolley – The Six Minute Strategist

Can you tell the difference between a Private Equity firm and a Venture Capital firm?

Before you start to think about trying to raise finance from Private Equity or Venture Capital providers you need to make sure that you are approaching the right type of investor.

Finding the right investor can be like looking for a needle in a haystack.  The British Venture Capital Association has over 200 investor member companies.  If you add non-members to this, which will include US and European investors there are over 1,000 investors (my database for the UK is currently at 1,093 possible sources of finance) who you have to screen in order to arrive at a short list of firms to approach.

So, how can you tell the difference between Private Equity and Venture Capital and then understand the different types of companies in each category?

Lets start by differentiating between Venture Capital and Private Equity.

Venture Capital

In theory, Venture Capital funds invest in companies at an earlier stage and with greater risk.  As a result they are seeking higher returns (as some of the companies WILL fail.)   The earliest stage they may come in is in a Seed Round, typically investing in the hundreds of thousands (pounds or dollars).

The next institutional investment rounds are lettered sequentially, Series A, Series B, Series C etc.  These rounds tend to increase in size and are normally done at increasing valuations (up rounds).     As the investee company matures, it may need some additional finance ahead of an IPO, a pre-IPO funding round would then follow.

Private Equity 

Private Equity Funds also have their market segments and specialisations.  My database of PE funds recognises the following categories.

1. Acquisition Finance – providing capital to assist with M&A transactions
2. Public to Private – delisting public companies from the Stock Exchange
3. Buy and Build – initial acquisition of a “platform” to which additional companies are added in a sequence of strategic or consolidating acquisitions.
4. Equity Release – providing capital to enable founders to put some money in the bank, to settle mortgages and school fees for instance
5. ReCapitalisation – providing new capital for an existing deal. A company may be struggling and need additional capital to continue trading.  This requires a reorganisation of the shareholding structure, in which the original investors often lose out.
6. Bank Refinancing – Often companies, with bank debt from an orginal deal, may struggle to meet their debt obligations and these funds put equity in to relieve the financial pressure.
7. Spin Out – the opportunity to acquire a division of a larger company.
8. Bridge Equity – where the investee company needs some short term finance to enable it to achieve a project/milestone or objective ahead of another round of financing.
9. Secondary – the purchase of a company from another private equity or venture capital firm
10. Active – inteventionist investors who come in to force boards to take a more proactive role in realising value from underperforming assets
11. Rescue/Turnaround – investing (cheaply) in companies in financial distress and where often the only other alternative is a call to the Administrator
12. Distressed Debt – the acquisition of debt in companies in difficulties, at a discount to face value
13. Special Situations – a catch all term to cover situations which may be complex or where the underlying company is in difficulty.  The additional capital can unlock the problem, releasing value for shareholders
14. LBO – Leveraged BuyOut – generally a term for larger deals where a large company is acquired using a complex blend of debt and equity
15. MBO – Management Buy Out – acquisition of the company from original shareholders by the encumbent management
16. MBI – Management Buy In – the same as an MBO except that the management in this case come from outside the company.  The hybrid of this is the amusingly names BIMBO – Buy In Management BuyOut
17. Expansion/Development – Growth capital for the expansion of the business.
18. Mezzanine – a hybrid between debt and equity.  Interest rates are often in the 12%-18% range, part paid and part rolled, often with equity warrants.  The interest cost is high but the equity dilution is low.
19. Venture Debt – this is effectively bank lending but not from a bank, from a fund
20. Junior Equity – a form of equity with a lower return and less rights than the normal equity. It ranks behind preference shares and ranks behind these shares on a return of equity.  When there are different ordinary share classes with different rights, those with the lesser rights will be “junior” to those “senior” classes with more rights.
21. Listed – investments in listed companies shares as an equity investment leading to  a minority interests.  These investments have to conform to the rules of the Stock Exchange.
22. Purchase of Quoted Shares – similar to the previous item, but more of an investment strategy than an investment in the company

Don’t forget just identifying the investor is just the start of the process, now you have to get their attention.  To do this you need to understand their investment criteria in depth and that is the subject of the next post in this series.

An Offer for UK Start Up Companies

Are you looking to raise Capital? Then go and look at this post which explains how I can help you to raise capital on a very cost effective and low risk basis.

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Next week, starting on Monday I am publishing a four part blog series on Private Equity and Venture Capital and this post is by way of a brief trailer for that series.

Recent conversations with Entrepreneurs have highlighted to me that the arcane world of Private Equity and Venture Capital is not well understood.

There is consequently a steep learning curve for those seeking investment which can put them at a material disadvantage.  These posts will of course not level the playing field but hopefully will go some way to opening up an understanding of the topic.

I have made a short video to introduce the posts.

As can be seen from the Magic Hexagon above , I am covering six main topics in the four posts.

Monday 20th February 2012.

Part 1 covers the different Types of Venture Capital and Private Equity Firms.  The criteria here are not mutually exclusive.  I concentrate on the stage of development for VCs and the types of transaction for Private Equity.

Thursday 23rd February 2012

Part 2 of the series looks at the Key Investment Criteria that an entrepreneur will need to meet to be considered even in the intial stages by an investment firm

Monday 27th February 2012

In Part 3 I look at How to Approach an Investment Firm, discuss in more detail what they are looking for and suggest 6 Reasons Why Business Plans are Rejected.

Thursday 1st March 2012

In the final installment, Part 4, I discuss some of the Main Characteristics of the Financial Plan that will have to be prepared and conclude by trying to explain the main Six ways that the VCs and PEs make Money through their investments.

The blog posts are scheduled to be released at Noon UK Time.

I would be very interested to know what further questions and clarifications you would like me to address on this topic. Please email them to me at jbdcolley[at]aol.com or comment below.

I hope you enjoy the series as much as I enjoyed writing it for you!