Private Equity vs. Venture Capital vs. Investment Banking

Private Equity vs. Venture Capital vs. Investment Banking

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.

Increase the cash flow to your business

while increasing equity at the same time

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