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An Overview: Venture Capital and Small Business Private Equity

An Overview: Venture Capital and Small Business Private Equity

One of the most significant barriers to growth for small businesses of all kinds is lacking access to funding. Financing can come from a variety of public and private sources. Some people consider small business private equity the same as venture capital. Other people see them as two completely different types of financing. These are two of the most prevalent non-bank sources of financing for small businesses, so why the ambiguity? The truth lies somewhere in the middle, and while they are similar, they are not quite the same. 

When evaluating which financing is best for your small business, it is important to understand what these two types of investments have in common, as well as what makes them different.

Similarities of Small Business Private Equity and Venture Capital

Private Lender

Both small business private equity and venture capital are private lending sources. A private lender is an entity that loans money but is not connected to any type of bank or credit union. Private lenders can be both small and large. A private lender could be an individual investor such as a family member or “angel investor,” as well as an accredited small business private equity firm, such as ValueStreet.

Flexible Structure

As private lenders, both come with distinct benefits you are unlikely to get from a bank. For example, bank loans and credit lines are notorious for their rigid lending requirements and term structures. Small business private equity and venture capital funds, on the other hand, are both more flexible and willing to work with small business owners to help them get what they need. And having greater flexibility in how the terms are structured will often result in better outcomes for the business owner.

Industry Expertise

Small business private equity and venture capital funds also typically offer the advantage of having an in-depth understanding of your business’s industry. Banks, however, do not usually have this kind of expertise available. Working with a private investor who offers advice backed by deep industry experience can make a huge difference in helping a small business grow in the right direction.

How Small Business Private Equity and Venture Capital are Different

Stage of Company at Time of Investment

One of the most significant inherent differences between small business private equity and venture capital is the stage at which the investment is made. Venture capital funds typically invest in the seed stage or startup phase of a business, often to help with things like product development or market research. Small business private equity firms will typically invest in established businesses and focus on their growth and expansion, such as entering new markets, adding new products or services, increasing sales, improving operations, and building a stronger organizational structure.

Type of Industry

Another difference is the type of industry in which each invests. Venture capital funds are very limited in the type of businesses they invest in, with a focus on the tech, biotech, and cleantech industries. Small business private equity firms, however, invest in a much wider range of business types, including everything from service-oriented companies like pool cleaners, landscapers, or even yoga studios, to product-based businesses like consumer brands, or commercial food production and even building materials suppliers.

Expectations for Return on Investment

Private equity and venture capital differ greatly in regards to expected returns. Small business private equity firms look for more consistent returns, generally seeking 2-3 times their investment. Venture capital funds are more interested in big payoffs and significantly higher returns on their investment.

Conclusion

Both venture capital and private equity are valuable funding sources for small businesses. They offer several advantages over traditional lenders. Small businesses considering private funding should start by looking at the two main distinctions: What stage in the business lifecycle is your company, and what industry sector does your small business focus on?

Unless you are a tech startup, there’s a very good chance that small business private equity is the best financing option for you. As with any large financial decision, it is important to do your research, inquire with experts about your specific circumstances, and evaluate different options. 

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