Private equity funding is a form of investment in which a large institutional investor takes 100% control of a large, established company in the hopes of turning it around and selling it for a big profit later. In this regard, there are some similarities with venture capital funding, since both private equity firms and VC firms take equity ownership interests in companies that are not publicly traded or listed.
However, there are very significant differences in the types of companies that private equity funds search out, as well as the size and scale of these investments. For example, VC firms search out high-tech and high-growth companies still in their very early stages, usually when they are still in the pre-revenue stage and require significant capital to make it to the next step in the startup lifecycle. In contrast, private equity firms tend to invest in established companies that are under-performing, and as a result, are significantly undervalued by the broader marketplace. The goal of a private equity investor is simple: streamline a company’s operations (usually by selling off non-core assets or winding down unprofitable divisions), return the company to profitably, and then sell later at a considerable profit.
Given the different investment priorities, there are also significant differences in the scale of the overall investment. Most VC investments are capped at the $10 million marks, with seed-stage investments much closer to the $1 million level. In contrast, private equity funds are willing to invest $100 million+ in a single investment. That means private equity funds are controlled, run and operated by substantial institutional investors backed by extremely high net-worth individuals.
Private equity funds also take a different approach to equity ownership than do VC firms. Most VC firms end up owning less than 50% of the various tech startups they invest in, with the company’s founders holding the bulk of the equity. Contrast that situation, though, to private equity deals, where most large institutional investors attempt to control 100% of the company. By doing so, they can act very quickly to sell off assets, pare down non-performing business units, and generally restructure a company much more effectively than if they had to run every decision past board of directors.
While private equity funds do sometimes get involved in the tech sector, they tend to focus on big tech companies that have fallen on hard times (like a big telecom giant with a bunch of very juicy assets or a once-innovative tech company with lots of patents or other intellectual property that can be auctioned off to the highest bidder). A big reason for this has to do with the amount of money that these firms need to put to work at any time – to move the needle; they need to invest $100 million at a time.
So, if you’re a startup founder, it’s good to know the names of private equity funds, but if you’re looking to raise money for your brand-new business concept, it’s far more effective to focus your time and energy on VC firms and angel investors.