Private Equity

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What Is Private Equity, and How Does It Work?

Private equity (PE) involves a group of wealthy individuals coming together to purchase a company. Investopedia says that “private equity investment comes primarily from institutional investors and accredited investors, who can dedicate substantial sums of money for extended time periods.”

These investors fit two separate categories: limited partners and general partners. The limited partners receive a smaller percentage of the profits than the general partners since the general partners manage and maintain liability for the fund. Most PE firms, such as Kohlberg Kravis Roberts (KKR & Co.) and Bain Capital, have significant portfolios and are worth billions of dollars.

Another important point is that the private equity exchanges do not occur on public markets. Depending on the situation and the type of private equity, the PE firm can buyout a public company, which takes the public equity off the market, or invest directly into a private company.

When they make the purchase, a private equity firm usually does not intend to keep the company forever. Instead, PE firms will usually have an exit strategy in place at the time of purchase. Their goal is to maintain the company for a designated amount of time, improve its margins, and sell it for a profit.  

What Are the Types of Private Equity?  

As mentioned in the previous section, there is more than one type of private equity. Each type involves institutional and accredited investors that are raised for different types of companies and can be used for different purposes.

These are not the only types of private equity, but these are some of the most common. Additionally, they are not always mutually exclusive from each other or from other types of financing, such as debt financing.  

Leveraged Buyouts

A leveraged buyout is what most people associate with the term private equity. In this type of transaction, a PE firm identifies a company that they wish to takeover. After selecting a company, they utilize a combination of equity and debt to make the purchase. Their goal is to improve the company over several years, then sell it off to another interested group or conduct an initial public offering (IPO).

Sometimes, the firm will purchase the company in its entirety, while other times it will simply purchase a majority stake. Either way, this allows them to control strategy and direction so that they can improve its current profitability and long-term projections, therefore increasing its value.

Fund of Funds

As you can probably guess from the name, a fund of funds maintains a portfolio that includes a diverse group of equity funds, as opposed to individual companies. This lowers the entry cost, which allows individuals and industrial investors who otherwise could not enter the market to invest. Most often, fund of funds invest into hedge and mutual funds.

Fund of funds are managed management teams of professional investors. This team charges fees to the individual and institutional investors to make informed decisions regarding their assets under management.

Venture Capital

While most private equity firms buy mature companies, venture capitalists (VC) seek out promising startups which could grow to yield significant profits. Oftentimes, the portfolio companies that VC firms invest in have significant growth potential, but need outside capital to reach that potential. VC firms rarely, if ever, take majority ownership. Instead, they make a smaller investment, allowing the management team to continue as the primary decision-makers.

Profitability is not a requirement for a VC portfolio company, but a decent cash flow and solid business plan are. Venture capitalists take a significant risk with every portfolio company, since it could crash and burn without ever becoming profitable. As a result, VC firms tend to hold a diverse portfolio consisting of many investments in the $10 million range.

Growth Capital

With growth capital, the goal is to provide a mature, proven company with resources to expand even more. The idea is similar to venture capital, but it presents less of a risk since the companies are already profitable. However, this means that the potential reward is also much smaller.

Companies that receive growth capital can use it for a variety of purposes. This includes entering a new marketplace, developing new products, or making a significant sales push.

Real Estate

There is a great deal of variety within real estate private equity, which centers on the exchange of property. Some real estate PE involves small investments that are sure to yield consistent cash flow, such as apartment rental buildings. This approach invokes the more typical PE approach of buying something that is sure.

On the other extreme, real estate PE can look more like venture capital. By making speculative moves on land that is projected to hold more worth later, real estate PE take a risk but also could achieve significant profits down the road.

Distressed Funding

Distressed funding is a specific version of the leveraged buyout. In this scenario, a mature company is struggling financially. A PE firm swoops in and purchases some or all of the shares for pennies on the dollar. The firm then attempts to restructure and revive the portfolio company, so that they can sell it at a profit later.

A firm could also purchase a company just to dissolve it and sell all of their assets for a profit. Many hedge funds also focus on distressed companies, so the line between these two is not always clear.

What Are the Advantages and Disadvantages of Private Equity?

The benefits and drawbacks of private equity vary depending on what stage of growth your company is in, as well as the type of equity. For instance, venture capital benefits young, unproven companies by allowing them to obtain capital, while a leveraged buyout allows a mature company to restructure and improve.

Here are a few of the most important advantages of private equity.

Less Regulation

With public companies and companies that are sold on the public markets, there are significant regulations. Any company that conducts an IPO must comply with the myriad of terms of the Security and Exchanges Commission.

However, private equity is available to a much smaller pool. Regarding private equity, Investopedia says, “there is less concern from the SEC regarding participating investors’ level of investment knowledge because more sophisticated investors (such as pension funds, mutual fund companies and insurance companies) purchase the majority of private placement shares.”

Mentorship

Since a private equity firm’s success depends on the success of your company, they will care about your business. Oftentimes, this means that they will want to be involved. With many PE firms having years of knowledge in your industry, their mentorship and opinions should help you improve your business.

Significant Capital

Compared with other means of raising capital, private equity usually provides the most. Alternatives such as angel investors and bank loans do not get close to the amount of capital that private equity can provide.

Most private equity investments are upwards of $100 million. While these investments go into companies that are worth much more, this type of capital injection can still produce significant results.

However, there can also be some major disadvantages to private equity.

Lose Equity

The entire premise of private equity is giving up a percentage of the ownership in your business for capital resources. However, giving up a majority of your company’s equity is nothing to ignore. Giving up all of our equity makes it difficult for you to obtain additional financing down the line.

Lose Control

While the mentorship provided by the PE firm can be helpful, it can also be frustrating. When the management team and the firm have different ideas about the direction and practices of the company, there can be significant conflicts.

What Types of Companies Use Private Equity?

Because of the variety of funding options that fall under the umbrella term of private equity, there is no singular type of company that can utilize it. However, different company types fit different PE types.

To be eligible for leveraged buyouts, distressed funding, or growth capital, your company should be proven and mature. This does not necessarily mean that you are currently profitable. The goal of these investors and firms is to revitalize a company that has already shown what it can do, but is struggling.

To that end, most PE firms invest roughly $100 million into their portfolio companies. This means that businesses worth significantly less are not common targets for leveraged buyouts or distressed funding. It also means that these types of PE firms have a consolidated portfolio, with a few very large companies. However, younger and smaller companies can still get in on private equity through venture capital.

What Does RevTek Offer?

At RevTek, we combine the benefits of different financing options to give your company the best solution. We provide revenue-based financing that works for each individual company. We work with you to craft a repayment plan based on your MRR. By working together to decide on a percentage of future revenue, we avoid taking any control or equity in your company.
Our process and terms are simple, allowing you to obtain as much as $2 million in growth capital. You can use the capital to meet any of your business’s needs and improve your sales and marketing, expand your broadband network or broadband development, acquire new equipment through purchase or equipment leasing, or develop new services. Contact us today.

Private Equity vs. Venture Capital vs. Investment Banking

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Regardless of the industry, every company will need outside capital at some point in their growth process. However, how your business obtains capital depends on where you are in your growth process and your industry. In this post, we will explore three primary ways to obtain capital for your business such as private equity, venture capital, and investment banking.

Private Equity

What is private equity?

Private equity (PE) involves a group of wealthy individuals purchasing a company together. Investopedia says that “private equity investment comes primarily from institutional investors and accredited investors, who can dedicate substantial sums of money for extended time periods.”

When they make the purchase, a private equity firm usually does not intend to keep the company forever. Instead, PE firms will usually have an exit strategy in place at the time of purchase. Their goal is to maintain the company for a designated amount of time, improve its margins, and sell it for a profit.

What types of companies use private equity?

To be eligible for private equity, you must have a mature, proven company. However, most companies that choose to take a PE deal do so because their company is struggling or is inefficient.

Another important point is that most PE firms invest roughly $100 million into their portfolio companies, which means that businesses worth significantly less than this aren’t eligible. It also means that PE firms have a very consolidated portfolio.

What are the advantages and disadvantages?

When you choose private equity, you usually give up 100% of your equity.  

Venture Capital

What is venture capital?

Venture capital, which is a form of private equity, is one of the most common ways for a young startup company to gain the resources it needs to get off the ground and become profitable. Typically, a group of venture capitalists, usually working together under a venture capital firm, put money into a young company with potential for growth.

When venture capitalists look for a company to invest in, they want a company that has significant growth potential. Their expectation is that the company will grow both in the short-term and long-term, providing them with a substantial profit along the way.

What types of companies use venture capital?

VC firms invest almost exclusively in young technology companies that have already proven the viability of their business, but aren’t necessarily profitable. For instance, a Software as a Service (SaaS) company with a solid monthly recurring revenue and ideas of diversifying and expanding would be an ideal candidate for venture capital.

Of course, not every startup tech company succeeds and grows exponentially. Since their investments are risky and don’t always yield profits, venture capitalists generally invest less than $10 million into any given company. This allows them to maintain a large number of portfolio companies without being overly dependent on any of them.

What are the advantages and disadvantages?

Unfortunately, VC firms require you to give up as much as 50% of your equity in your company, and may require you to give up seats on your board. Differing expectations and ideas between you and the firm can lead to conflicts in day-to-day operations and the overall vision for your company.

However, venture capital is a great way for young companies with potential to obtain significant growth capital. Compared with other ways for startups to raise capital, venture capital usually provides the most resources.

Investment Banking

What is investment banking?

Investment banking is a division of banking that involves the collection of capital for other companies and entities. They help clients with decisions such as mergers and acquisitions, expansions, and restructuring.

As Investopedia puts it, “investment bankers work on the sell-side, meaning they sell business interest to investors. Their primary clients are corporations or private companies.” Instead of investing in individual companies with the hope of achieving profits, investment bankers spend much of their time advising and facilitating transactions for other businesses.

What types of companies use investment banking?

Investment bankers serve as advisors to companies who are attempting to gain capital or change their structure or operations. They bring in other partners and other groups who can facilitate deals for their clients. Private equity firms attempting to implement an effective exit strategy could also benefit from using an investment banker.

For instance, let’s say that a business decides to conduct an initial public offering (IPO) to raise the funds that they need. They would greatly benefit from contacting an investment banker, who could help them order new shares of stock or find buyers.

What are the advantages and disadvantages?

Investment banking is ideal for a company conducting an IPO or selling their business. Investment bankers can leverage their connections and knowledge of markets to find potential buyers that you may not have thought of. They can also help you restructure your company in an effective and efficient way.

However, if your sole desire is to obtain capital without restructuring or any sort of merger, then investment banking is not the best option for you.

How Do I Know Which Is Best for Me?

The answer to this question largely depends on your industry and position as a company. For instance, venture capital makes the most sense for a growing technology company with consistent cash flows and growth potential, whereas private equity is the ideal choice for a mature company that needs a shot of capital.

Strictly in terms of raising capital, PE and VC are the most effective. Of course, they are on different scales, with private equity typically providing upwards of $100 million and venture capital $10 million or less. Your willingness to give up equity and control, your need for large sums of capital, and the growth stage and potential of your company all factor in to which of these options is the best for your company.

However, these are not the only ways that you can obtain capital for your business. Bank loans are a common route for obtaining capital. While bank loans do offer relatively low interest rates and don’t require giving up equity, they are difficult to obtain, especially for smaller startup companies that have yet to prove that they are profitable.

There are other options for startups, such as crowdfunding and angel investors. These are inconsistent and difficult to achieve, but they are effective when done properly.

What Does RevTek offer?

At RevTek Capital, we understand the complications and challenges that come with obtaining capital. Whether it be a bank loan or another source, every type of loan has its drawbacks. That’s why we’ve simplified the process for small tech businesses with recurring revenue.  

Our model is quite simple: we provide the capital, and you pay it back in manageable monthly payments based on your monthly, recurring revenue. To be eligible, you do not need to be profitable, but you should have a predictable recurring revenue of at least $50,000 a month. The benefits are substantial:

  • We don’t take your equity.
  • We don’t take any control or ownership away from you.
  • Our terms are simple and easy.

If you are looking to raise capital for your startup, choose RevTek. Our experienced team can provide you with the money you need to expand your tech startup. Contact us today to learn more about how we can help your business grow.

Ways to Raise Capital for Startups

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No matter how you spin it, sufficient capital is a necessity for the growth of a successful startup. As Finextra says, “capital is the basic ingredient for any business to thrive.” However, raising capital can be a difficult, time-consuming endeavor for any startup company. Let’s explore some ways to raise capital for startups.

You may have a strong business plan and need to raise startup funds, or you could also be a small company looking to raise the capital to expand your reach or change your market. Regardless of where you sit on this spectrum, you almost certainly need capital to continue moving forward.

Whatever your needs are, there are several different ways that you can go about raising money for your small business. Here are a few of the ways that you can raise startup capital.

Crowdfunding

In short, crowdfunding is promoting your business idea and encouraging people to invest. There are a variety of crowdfunding platforms, including gofundme and kickstarter, that can help you gain support from investors.
Here are some of the benefits of crowdfunding:

  • No debt: One of the most noteworthy benefits of crowdfunding is that you won’t have any significant debts to pay afterward. Almost any other business loan you get will involve significant debt that includes interest rates.
  • Free advertising: Crowdfunding through different platforms allows you to promote the cause, but it also lets the people promote your business for you. Through sharing on these sites, as well as social media, your investors and potential investors can also function as your advertisers.

Here are some cons of crowdfunding to raise funds for your business:

  • No assurances: As you promote your cause and ask the general public for donations, there is no guarantee how much money you will receive. A small startup could have a goal of $15,000, but only receive $2,000. While that smaller amount of money may still be helpful, it is difficult to plan ahead when you do not know how much support you will garner.
  • Competition: You will not be the only startup financing their growth through a crowdsourcing platform. Your competition may also pitch their similar business model on a crowdfunding platform, meaning that you may lose out on capital because another company took attention away from yours.

Angel Investors

Sometimes, an individual or group of individuals will make what is called an angel investment in your company. This means that the person or persons will provide significant capital in a business startup.
Here are some of the primary benefits of angel investors:

  • Risk: Generally, angel investors invest in risky startups. If they like your idea and business model, they will provide finances even if you have yet to prove yourself. This is very different from banks, who need to see profitability before they invest.
  • Mentorship: Typically, angel investors will have experience in the field you are in, which allows them to come alongside you, help you understand the business or industry, and advise you on decisions and future plans. Having this sort of partnership can aid the growth and success of your business.
  • No debt: Most angel investors do not require you to return the money that they provide you, which differs from all other options except crowdfunding.

Here are some of the biggest drawbacks of angel investors:

  • Small Amount of Capital: Compared to the amount of money that you could receive from a venture capital loan or the bank, angel investors usually don’t provide that much capital. There are exceptions, but generally, angel investments are less than $100,000.
  • Loss of Control: According to The Balance Small Business, “your angel investor will have a say in how the business is run and will also receive a portion of the profits when the business is sold.” This differs from bank and venture capital models, but this makes sense when you remember that you do not have a debt to repay.

Venture Capital

Venture capital is financing for startup companies that need capital. Venture capitalists are gambling on the success of your business, so their rates are steep. Here are some of the primary benefits:

  • Risk: If you can prove that you will be successful, venture capitalists will invest before you demonstrate profitability.
  • Capital: Most venture capitalists will provide significant dollar amounts, especially when compared to bank loans.

Here are some of the main drawbacks of venture capital:

  • Interest: Because of the risk involved, venture capital generally involves exceptionally high interest rates. This can make paying the loan back a difficult process that lasts years longer than it would for a bank.
  • Control: In addition to the interest rates, venture capitalists need some control in your business to make their risky investment worthwhile. This can lead to conflict or your business operations changing from your original intention.

Bank Loans

In theory, this is the simplest of the types of loans, but in reality they are quite complicated. Here is the benefit of working with banks.

  • Cheap interest rates: This is the lone benefit for SaaS and other similar tech companies. The rates are significantly lower than venture capital.

Here are the cons of working with banks:

  • Time-consuming: One of the worst parts of applying for government loans is the time involved. Receiving venture capital or even crowd sourced funds can be quick. The bureaucracy involved with bank loans complicates and extends the process significantly.
  • Must be Profitable: This all but prevents most tech startups from receiving bank loans.

How does RevTek Raise Capital for Startups?

RevTek helps small business in the tech field gain the capital that they need to expand and surpass their current levels of success. RevTek provides the combination of capital and freedom that can help you gain the capital you need.

Our model is quite simple: we provide the capital, and you pay it back in manageable monthly payments based on your monthly, recurring revenue. To be eligible, you do not need to be profitable, but you should have a predictable recurring revenue of at least $50,000 a month.

Here are some of the major benefits of gaining capital from RevTek:

  • We don’t take your equity. RevTek has no interest in gaining power or taking away your equity. We want to ensure that you succeed.
  • We don’t take control. Many of the options provided to you involve losing some control of your business. Whether it be an angel investor or venture capital group, they are looking for some share and power in your business. Not RevTek. Our goal is to provide you with the capital that you the need to carry out your effective business plan or expand into a new market.
  • Quick and simple. Many of the methods mentioned above for raising capital are quite complex, time-consuming, and can leave you feeling unsure of the end result. At RevTek, we provide a painless, quick process.

If you are looking to raise capital for your startup, we want to help you. Our experienced team can provide you with the money you need to develop or grow your tech startup. Contact us today to learn more about how we can help your business succeed and grow.