Tyler Tysdal is a man who knows just about all that there is to know about investment and throughout his career he has been an investor, a fund manager, an analyst and an advisor to many wealthy individuals and businesses. I was very lucky to be able to spend some time with Tyler recently to discuss something which many of you have been asking about, the differences between venture capital and private equity and more to the point, what that means for investors like you. Both of these investment vehicles look the same, but there is in fact much more than meets the eye.
Let’s get started with what private equity is, and how it operates. This is an investment fund which will invest in a business which is already established. This investment may happen because the business requires more capital or it may be that the business is going through tough times and needs some capital and some advice on how to move forward. During the private equity deal the business may agree to sell off a branch of its business, or to change strategy to appease the investors. The private equity fund will look to get a board position and it will normally liquidate its investment when the business is on the up.
Much like private equity a venture capital fund will also look to invest in business, but that is really where the similarities end. Venture capital funds look for young businesses in exciting and growing industries where it will add investment as well as expertise to impact opportunities and to give the business the best chance of success. The investment will take place at the veining of the business’ life and in return the fund will normally seek a sizable stake in the company, up to 49%. The idea of this higher risk investment is to watch the company grow and then cash out when the business is listed on the stock exchange or when the growth is sufficient for the investors.
As you can see there are clear differences between risk level, ownership levels and industry types between these two different investment vehicles.
If you want to invest in either of these fund types then the first thing that you need to do is arm yourself with as much information as you possibly can about each. Understand which companies offer which funds, and how successful they have been in the past. You should also be thinking about the risk which you want to take, venture capital is always a riskier investment as there is a lot of uncertainty around how the business will get on. Finally you need to ascertain what kind of return you are looking to get back on your investment and which of these funds is going to be best equipped to deliver your goals.