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The venture capital economic model is very different from that of private equity. VC makes relatively small investments in many extremely risky firms, hoping fo
by barry-cotter 7y ago
The venture capital economic model is very different from that of private equity. VC makes relatively small investments in many extremely risky firms, hoping for a few massive blowout hits which return the entire fund by themselves. PE buys firms with proven economic models, cuts costs and tries to improve management in some form, whether by bringing in real estate expertise for franchises (think Starbucks or McDonald’s) or doing bog standard MBA stuff like KPIs and improving staffing, hiring or internal IT.
At the high end of VC you get some overlap with PE, like SoftBank investing $X00 million in hot “startups” but PE does not chase 100x returns on investment. They’re in the business of taking a company worth $100 million and turning it into one worth $500 million.
- rmah 7y agoVenture Capital is a strict subset of the Private Equity industry. They are not outside it, they are deep within it. PE firms do exactly what VC firms do (though often with different sorts of businesses), plus a lot more.
- notfromhere 7y agoVCs don't do the same kinds of questionable financial engineering that PEs do.
- formercoder 7y agoOnly because they can't. Leverage requires steady cash flows, fixed assets, etc. If VCs could increase their potential return while also increasing financial risk to their portfolio, they absolutely would. Across private equity there is a spectrum from small cap to large cap with increasing leverage. The small cap funds do a combination of the leverage tricks available to PE investors as well as the deal structure tricks available to VCs (preferred, etc).
- notfromhere 7y agoThey can't so they don't. That's why its irrelevant.
- CPLX 7y agoIndeed. They do slightly different kinds of questionable financial engineering.
- pmart123 7y agoWhile the first part of your post is correct, they operate extremely differently.