We know that girls just want to have fun, but what about their funds? If you are also looking for funding options, you may have come across private equity funds. 

The term may bring images of spreadsheets, Wall Street, and busy bankers to your mind. You might also be imagining large investor meetings with very wealthy individuals. 

Though these mental images are accurate, they do not give the clearest picture of private equity funds. Even if you have heard of this term before, you might still be unsure about what they are and how they work. You might also be wondering if they are a good option for financing your start-up. 

So, what are private equity funds, and can they benefit your start-up? Read on to find out!

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What is a Private Equity Fund? 

Private equity (PE) funds are one option for investment. In a PE fund, a group of investors makes direct investments into companies. Typically, they do not hold stakes in companies on the stock exchange. Although they do sometimes buy public companies, their goal is usually to take them off the stock market. Often, private equity funds will buy a business, improve it, and then sell it at a higher rate. 

These funds require a large financial commitment, so most investors are high-net-worth individuals and firms. They also usually buy the majority of a company’s shares or even 100%. As such, private equity investors have one goal: making a return on their investment. 

What Are Some Examples of Private Equity Funds? 

There are countless examples of PE funds. However, according to Private Equity International, the top three are the Blackstone Group Inc., KKR & Co. Inc., and CVC Capital Partners. Each of these organizations has hundreds of billions of euros in capital. They also have private equity portfolios including hundreds of companies around the world. 

As such, there are many famous companies which are – or have previously been – backed by private equity funds. Some you may already be familiar with are: 

  • Barnes & Noble
  • Engel & Völkers
  • Expert Global Solutions
  • FAO Schwarz 
  • Getty Images
  • Del Monte Foods

And, of course, many, many more

This list shows companies which were already established at the time of investment. However, they were decreasing in revenue. Private equity funds stepped in, buying most or all of the company. Then, they used their expertise to improve operations. In some cases, the company was sold again afterwards. Without private equity funds, these companies may not have survived at all. 

Can Start-Ups Benefit from Private Equity Funds? 

At first glance, private equity funds may seem like a good start-up financing option. The investors have a lot of capital and use their expertise to increase revenue. Unfortunately, most start-ups would not benefit from private equity funds. There are a few key reasons why:

  • Private Equity Funds Take Majority Ownership

Usually, the investors of these funds like to take majority ownership of a company, if not 100%. This is so they have the power to manage and improve the business to increase revenue. 

  • Selling is Always on the Table

For many entrepreneurs, selling their company is not the goal, but a last resort. However, for private equity funds, profit is more important than vision. This means that selling is always an option – and, having majority ownership, a real possibility. 

  • They Don’t Invest in Start-ups

Finally, the most important reason why start-ups don’t benefit from private equity funds: they’re not usually an option. Because the amount of capital they invest is so large, and start-ups are such risky investments, most private equity funds prefer to invest in established companies. 

If an entrepreneur has grown their start-up into an established company, a private equity firm may be interested in investing. However, you should only agree if you are prepared to give up majority control and potentially sell your company. Conversely, you may want to remain in control as your company grows. If so, you should look not at PE funds, but venture capital. 

Uh, What is Venture Capital Again?

Venture capital (VC) is another form of investment. Similar to private equity funds, venture capital involves a group of investors collectively funding companies. The members of this group are called venture capitalists. 

Just like private equity investors, venture capitalists directly contribute to companies, hoping to gain a return on their investment. However, VC  and PE are not the same.  

How is Venture Capital Different from Private Equity Funds? 

The differences between PE funds and VC are sometimes hard to see. However, two key differences typically make venture capital a better financing option for start-ups:

Venture Capital Firms Take Shares Not Control 

Although private equity funds like to buy most or all of a company’s shares, venture capitalists do not. Instead, venture capitalists like to take small amounts of shares in many companies. So, while they may offer mentorship, they are typically not interested in complete management. This means that the entrepreneur retains control over their company. 

Venture Capital Firms Are Actually Interested in Start-Ups

Most PE funds are not interested in financing start-ups because they are too high-risk, which is very off-putting for them. Having invested a very large amount of capital and with majority control over companies, private equity firms prefer security. 

However, venture capitalists live for the thrill. With their diversified and small shares, venture capitalists can afford to invest in risky start-ups. In fact, that is exactly what they want. Venture capitalists use their funds to finance new and emerging companies that have promising futures.

What Are Some Examples of Venture Capital?

Just like with private equity funds, there are countless examples of venture capital firms. Some of the top examples, however, include Tiger Global Management, New Enterprise Associates, and Sequoia Capital. 

There are many famous examples of companies which grew successful thanks to venture capital. Some that you may already be familiar with are: 

  • WhatsApp
  • Facebook
  • Groupon
  • Alibaba
  • Uber
  • Airbnb
  • Uber
  • Zoom

And, of course, many, many more

As you can see, some of the most well-known companies today actually began as start-ups. These companies were selected by venture capitalists for their promising futures. Now, they are massive enterprises known and used around the world. 

Of course, not all start-ups backed by venture capital will be as successful as WhatsApp or Zoom. Unfortunately, in the business world, even great start-ups with good funding can still miss the mark. However, this list shows how venture capital can turn a small start-up into a powerful company. 

The Bottom Line

Through this article, you have learned what private equity funds are, how they work, and some famous examples. You have also discovered what venture capital is, how it differs from PE funds and some more famous examples. 

However, the most important takeaway here is why venture capital is better than private equity funds for start-ups. While the capital and expertise of private equity funds may look tempting, they are not a suitable financing option for start-ups. 

Instead, you should focus on finding financing through venture capital. Venture capitalists are actually interested in helping to build start-ups, unlike PE funds. Additionally, venture capital allows entrepreneurs to stay in control of their businesses. 

In the end, although private equity funds can be a good option for established businesses, start-ups should look to venture capital. 

About the author

EWOR is a school conceived by Europe’s top professors, entrepreneurs, and industry leaders. We educate and mentor young innovators to launch successful businesses.

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