The search for funding for a new business can be a trying experience. Traditional bank products are expensive. Loans and investments from family and friends risk mixing business with emotions, and soliciting capital from the public is complex given the strict securities laws in the U.S. With these difficulties, it’s no wonder that so many start-ups are turning to Private Equity funds and Venture Capital firms for seed funding (“PE” and “VC,” respectively). Outside of Silicon Valley and other large start-up markets, it can be challenging to find a PE/VC opportunity. However, if you can “get in the door,” it’s important to understand the differences between the two.
Private Equity funds, like hedge funds, use the money they raise from wealthy investors to invest in alternative and high-risk investments. As hinted by the name, PE funds generally take an equity interest and act as any other shareholder might. PE funds may have a theme of investments they make, so it is important to seek out the correct type of PE fund. Do your homework.
Venture Capital firms differ from PE funds in the sense that they will often take a more proactive position in the business. They might offer back office support, technical support, or may require that they have a direct management interest or board seat (although some PE funds may require conditions as well). It is common for both to offer unique methods of investment, such as convertible notes or loans instead of straight equity purchase, but these methods of investment are more common for a Venture Capital firm. While a Venture Capital firm might itself have some investors, it is more common for a VC to have a small number of wealthy individuals with significant expertise in certain business areas. Therefore, it is again important to research the VC firm you approach, but for different reasons than above.
It’s essential for your company to have counsel when fundraising. Sirote can help with finding, applying, and executing transactions with PE funds and VC firms. We can also help with shareholder agreements, general offeror counsel, alternative methods of fundraising, and much more.