In this article, we’ll delve into the differences in private equity investing, examining the career considerations between venture capital, growth equity, and buy-out. All three of these firms aim to acquire equity positions in companies, but what separates them is usually the size and stage (maturity) of the companies they target and the level of control they want (minority/majority ownership). However, they still all share a similar goal of increasing revenue, profitability, and ultimately, the value of the underlying company. Therefore, the main aim is to generate a positive return for themselves and their investors during the investment’s exit. When considering a career in private equity, you must consider not only what interests you but also the type of expertise and support you can and are willing to offer the companies you’ll work with. I’m going to help you make this decision by showing you the key differences between the firms (VC/GE/BO) and the skills needed to work with each.
What is Venture Capital? (VC)
Venture capital investment firms seek new businesses or early-stage startup companies that show promise in their industry. These are often businesses with innovative ideas that may bring in significant revenue in the future. Venture capital firms help businesses that are unlikely to obtain bank or corporate loans. This is either because the company is trying to serve or establish a new market segment, it is outside of what is considered a ‘traditional business’, or it has low assets for the banks to use as collateral. Venture Capital used to be known as “adventure capital,” which correlates with the risk involved when exchanging money for ownership in a company. It’s high risk but offers high rewards if the underlying company achieves the material success hoped for. As a result, venture capital funding is usually not that large in £/$ terms. It could be anywhere from tens of thousands to hundreds of thousands and beyond. Of course, there are examples of companies raising tens of millions or even hundreds of millions for their first-time raise, but this is incredibly uncommon and not something seen very often in the industry. Venture capital funding is usually used to “prove” a business model and market fit. The control (ownership) over a startup is also not generally very high. Their model is to invest in a large number of companies with a relatively low investment amount and see which companies generate the traction and success they claim will happen. It’s up to the founders to demonstrate their competence at executing before they earn the attention and guidance of growth equity and buyout investors. While the investors are motivated to help the company succeed, they don’t tend to seek a hands-on approach to management. The venture capital investors act more like mentors who offer their advice. There are some big venture capital firms in the world, and some of the top ones are:
What is Growth Equity?
Unlike venture capital, which focuses on investing in early-stage startup companies, a growth equity fund invests in mid-stage/mature businesses that have already proven to the business world that they can generate consistent revenue and prove a product market fit. These businesses have high potential and are looking for additional capital for expansion. They tend to want to expand either by entering new markets, enhancing their products, or potentially acquiring their competitors or other businesses, which will take their growth to the next level. This is where growth equity comes in. The fund provides the money to help them accomplish their goals faster. It’s high-risk, high reward, as you’ll be investing in a business that is trying to win over its competitors within a particular industry segment. Growth equity firms invest tens to hundreds of millions of dollars in these companies, but similar to venture capital; they don’t often acquire an ownership stake. This frequently gives them moderate control, usually provided with one or more seats on the company’s board of directors, allowing them more involvement in decisions. Instead of making significant changes themselves, growth equity firms will collaborate with existing management to develop strategies to prosper. Some well-known growth equity funds include:
What is a Private Equity Buyout?
Another path investors can take is a private equity buyout (also known as a management buyout or leveraged buyout). This option tends to involve mature companies like growth equity, but instead, with a focus on gaining controlling stakes and majority ownership of the business. This gives the fund a large amount of control over how the company operates and all the important decisions. Unlike growth equity, buyout private equity investors typically seek out undervalued or underperforming companies. By having controlling stakes, the investors can push management to make changes they want or otherwise change management. The buyout company might seek to make operational transformations, reduce costs, acquire competing businesses, or restructure the business entirely to enhance its overall value. The end goal is to eventually sell the improved business for a higher value and thus generate a return. Due to seeking a majority control (51%+), the capital amounts (£/$) needed tend to be higher than in venture capital and growth equity but ultimately is determined by the value of the underlying company. There are venture capital firms that commit capital amounts much larger than buyout firms. It has to be viewed in terms relative to the industry and opportunity rather than the monetary amount. Here are some notable buyout firms in the industry:
Which Style of Investing is Suitable for You?
You now know what each of the funds is, what they aim to do, and the level of control they have over their private equity investments. However, which one is the best one for you to start a career in? When deciding, you can consider:
Risk Tolerance and Financial Skill Set
The first of these categories is how much risk you’re willing to take and the skills you can contribute to the fund:
Venture Capital Investing
I’ve found that this career is best suited for those more comfortable taking high risks, as there is significant ambiguity around whether your investment will be successful. You’re unlikely to have much or accurate data about the company you are investing in, or even the industry in which it operates. Therefore, there is not much to compare to and little ability to “model” out your predictions. There is more emphasis on your ability to stay up-to-date with new and evolving markets and foresee opportunities than it is to be able to put together complex financial models. If you’re going to contribute to finding the right startups to invest in, curiosity and a discernment for spotting which companies are best positioned are your greatest strengths.
Growth Equity Investing
If you’re satisfied with taking on some risk but seek some reassurance through prior experience and a demonstration of traction, then you might be best suited to join growth equity investors. Despite already displaying high growth, there’s still material risk in these firms; they’ve likely got competitors racing to win over the market. You’ll need to possess strong financial capabilities and the ability to understand various market dynamics.
Buyout Private Equity Investing
Buyout investing suits best those who get reassurance from more data and information and can apply a higher level of discernment. The businesses in which you are investing tend to be “mature”, and have consistency, or predictability around revenues and cash flow. The requirements of your skill set and interest in the role can be determined by how operationally involved the PE firm intends to be. Some aim to make material returns through various value-creation initiatives. Other buyout firms consider themselves to be “investors,” contributing to high-level strategy but otherwise able to make returns through creative capital structure initiatives. The companies you’ll invest in will likely have significant financial and industry data available, which, alongside numerous creative ways of providing capital, usually means a higher requirement for financial competency. As you’ll be taking a controlling interest, you could argue there is more pressure on you to be effective stewards, identifying potential growth opportunities and optimising costs.
Commercial and Emotional Intelligence
Secondly, you need to look at the types of business and people skills you have:
Venture Capital Funds
To attract the interest of new, promising companies, you must communicate well with others and have strong networking skills. The goal is to build relationships with entrepreneurs and other industry experts, so you need strong emotional intelligence and relational skills. Given the stage of the companies you’re investing in, it’s worth noting that the company founders are potentially less seasoned business builders and operators. With the high-risk stage of the business they’re in, emotions and responsibilities are likely to be much more volatile. Your ability to empathise and support them in meaningful ways is of high importance.
Growth Equity Funds
I would argue that growth equity requires a more rounded and grounded balance between financial and logical thinking and emotional and people intelligence. You are generally dealing with more seasoned and sophisticated business owners/operators than venture capitalists, but this can have pros and cons. Remember that you still only have a minority ownership position, so your ability to demand change from management is limited. Therefore, your ideas for direction need to be positioned carefully for buy-in.
Buyout Private Equity Funds
If you consider yourself to have strong leadership skills, perhaps a buyout is the preferred option. You’ll be required to strategise, organise, communicate, and monitor the changes you wish to implement. The level of control is determined by your level of involvement in strategic and operational initiatives, but either way, you are the primary owner of the business. You’ll be required to make tough decisions and find creative ways to ensure the business’s success.
Compensation Structures
I am often asked many questions about the compensation structure of the different investment paths. Compensation structures vary across venture capital, growth equity, and buyout private equity investment roles, each offering a unique combination of base salary, bonuses, and carried interest. The fund size affects compensation as much as the investing strategy. It directly affects the management fees that a fund earns and, therefore, has available to compensate its employees.
Venture Capital
Venture capitalists tend to earn a lower base salary and bonus than growth equity and buyout investors. This makes sense when you consider a venture capital firm’s business model and economics. Firstly, they tend to raise smaller pools of capital than those mentioned earlier. Thus, the 2% (assuming) management fee is correspondingly smaller. This reduces the operational expenses the venture firm has to pay its employees. Secondly, venture firms have much longer investment time horizons than growth equity and buyouts. As a result, the speed at which they realise any profits they make is much further out. Venture capital economics relies on making high outlier returns from successful private equity investments. Therefore, the main incentive is a share of high carried interest.
Growth Equity
Growth equity firms come with more of a balanced compensation package combined with a competitive base salary. The bonuses you receive will be based on your individual performance alongside the firm’s investment success. You can also receive carried interest, but it isn’t as relied upon or as heavily weighted as with venture capital as yearly cash comp tends to be material.
Private Equity Buyout
Buyout private equity firms offer individuals a higher base salary than other firms due to more predictable cash flows in the investments and generally larger fund amounts raised. The bonus structure is often similar to that of growth equity investments. Although the percentage allocation of carried interest you receive may not be as high as venture capital, the amount (£/$) is material due to the size of investments you are usually dealing with. Generally, the larger the fund, the higher the yearly compensation, the smaller the percentage of carried interest, but ultimately, higher carried interest payouts (£/$).
Conclusion
There’s a lot to consider when choosing an investment career. And there’s not really a “right” answer I can give you for which one you should go for. But by being reflexive, self-aware, and knowledgeable about the various options available, I hope you can find your way into a role and company that you find enjoyable and fulfilling. Remember, you have strengths in your weaknesses and weaknesses in your strengths; it’s all contextual. My final piece of advice is that if you are unsure, it is easier to go from buyout > growth equity > venture capital than the other way around. So, if you’re unsure and wish for more optionality, go later stage.HighWater Search is here to help you curate your career. We provide investment firms with elite talent. Contact us today for a free consultation.
