Tuck Private Equity Club
What is private equity?
The term "private equity" is the term generally used to cover the industry as a whole, both buy-outs and venture capital. "Venture capital" is a subcategory covering the seed-to-expansion stages of investment. "Private equity" describes equity investments in unquoted companies often accompanied by the provision of loans and other capital bearing an equity-type risk.
Private equity, also known as venture capital (VC), is investment outside of public capital markets. While private equity can be raised from a variety of sources, such as friends, family members, and business angels, the more visible (and measurable) avenue is the private equity market where funds are channeled to businesses- typically in new or fast-growing unlisted companies, or companies in financial difficulty with potential for restructuring- by fund managers.
Why raise venture capital?
Top reasons for seeking venture capital funding are:
How do I obtain VC?
Raising VC is like any sales process, it is important to understand the market and the customer. This can greatly reduce the length of time needed for capital raising, as the process can take anywhere between 12-52 weeks. Understanding the market can be achieved though selecting 6-8 VCs who have a track record of investing in your industry, stage of company and with amounts required by you (ie "qualified prospects"). On selecting 6-8 VCs an entrepreneur should understand each firm's investment process and terms. Entrepreneurs should expect to make over 70 presentations before receiving the money. Key tools for the entrepreneur raising capital are the business plan/information memoranda and a 20-minute PowerPoint presentation. Both tools should clearly and concisely explain the business and the investment opportunity the business presents.
How do venture capitalists work?
Professional venture capitalists (VCs) manage funds on behalf of clients (both retail "mums-and-dads" and/or institutional). VCs are remunerated through a management fee (1%-3% of funds under management) and a commission/bonus out of the profits of a successful investment portfolio (known as "carry"). The carry on most funds is, on average, 20% and provides significant incentive. Typically funds are drawn down from investors on an as-needs basis, hence there is usually a two-week gap between signing the investment contracts and funds flowing. In essence VCs buy and sell shares in private companies. They seek to achieve returns of 20%-50%+ (depending on the stage and risk of the company) in 3-7 years. They achieve their returns through selling their shares or the assets of the company. VCs invest in one in a hundred opportunities. And would typically see 200-600 opportunities per year.
How is the VC involved in the company after the investment?
While a VC is on the board of the company, they are typically not involved in the day-to-day operations of the business. In general, VCs are usually involved in strategy as opposed to execution. However, a VC will get involved in recruiting, further capital raisings, merger and acquisition discussions, business planning, and general support of the CEO (amongst other matters).