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Venture Capital versus Private Equity

See all articlesVenture Capital versus Private Equity
Private equity
By
Sean O'Neill
Sean O'Neill
Director
December 4, 2019
5
minute read

The difference between two types of investment firms

People often confuse the two types of investment firms and they are markedly different.

In Australia, there are fundamental differences between Venture Capital and Private Equity firms, these being:

  • Venture Capital firms look for pre-profitability, market-changing businesses, like tech start ups.
  • Private Equity firms go after stable, sustainable investments to employ large amounts of capital.

Nash Advisory has everything you need to know about investment companies looking to buy. To find the right private equity buyer for your business, get in touch with our team.

Venture Capital firms

Venture Capital

In Australia, Venture Capital firms will typically invest in start-ups or firms that are scaling up rapidly. Most of the time, the companies they invest in will:

  • Be pre-profitability
  • Have large ambitions and a solid business plan
  • Have a technology aspect to their business model

The goal of Venture Capital is to rapidly grow companies over a short period of time. For these firms, investing is a numbers game, and it's backed through diversification.

A Venture Capital firm may invest in 50 companies. Throughout this investment, they will likely end up with a result similar to the below:

  • 5 will perform exceptionally well
  • 10 will generate a return
  • The remaining 35 will fail

The goal of Venture Capital is to rapidly grow companies over a short period of time. For these firms, investing is a numbers game, and it's backed through diversification.

What do Venture Capital firms not do?

Here's what Venture Capital firms do not do:

  • Provide cash off the table to founders – all cash is invested into the business
  • Invest in businesses with large asset requirements – for example, trucking
  • Invest in companies unless the goal of that company is to materially change the market
  • Act in a "hands on" manner

Australian Venture Capital firms usually don’t like to deal with advisors. Their preference is to talk directly with a founder and to shake on a deal before getting into the nuts and bolts. Nash Advisory does not provide services to start-up companies for this reason.

If you own a small or medium sized business, there are several other avenues for accessing growth capital.

Private Equity firms

Private Equity firms

In contrast to Venture Capital, Private Equity is later stage money, meaning that Private Equity firms only invest in companies that are already making good levels of profits – for example, in excess of $3 million per year.

Private Equity firms:

  • Aren’t looking for world changing investments
  • Aren't looking for super-sized returns
  • Are aiming  to grow a company in a measured manner over a 3 to 5 year period.

As a hypothetical, a Private Equity investor may typically undertake 8 deals in a fund, and expect to generate positive returns on 7 of those deals.

PE are therefore very cautious and want:

  • An A-grade management team
  • Growth rates of 10-30%
  • Multiple levers for change
  • Acquisition opportunities to bulk up the investment
  • Opportunities where they can add value by being "hands on"

However, the biggest driver for Private Equity investment is that they look for deals where they can deploy at least $20 million of capital into the opportunity.

They are happy for founders to take cash off of the table, although their minimum cheque size makes Private Equity unattainable for most Australian companies.

How Nash can help

Nash Advisory knows all of the small, mid-market, and large private equity funds in Australia and have undertaken over 10 transactions with such firms in the last 3 years.

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