How Venture Capital Firms Use Private Equity to Transform and Power Business Operations

Posted: May 10, 2020

Private equity consists of funding from investors that is applied toward the purchase and sale of businesses. Traditionally, private equity firms will take over a poorly run firm or one which needs time to turnaround. They then bring in efficiency experts to boost productivity, cut waste, and boost profitability. Though private equity rarely focuses on startups and typically seeks ongoing businesses that are having difficulty or are mismanaged, venture capital—as a subset of private equity—is exclusively focused on start-ups. Venture capital firms find opportunity in start-up businesses that hold the potential to transform into successful corporate enterprises. By engaging in partnerships with incipient businesses, these firms anticipate a mutual benefit on behalf of both parties—with venture capital firms reaping dividends in the form of the businesses’ shares and profits years after the initial investment is made in the organization. Venture capital financing is usually generated from the pooled assets of wealthy investors and investment banks. Venture capital firms sustain their operations by charging annual management fees to their constituents and capitalizing off of carried interest from the asset pool. A venture capital investment usually takes place during what is called a “seed funding” round. In a Series A round of initial funding, venture capital entities provide private equity funding to companies—with the anticipation of profiting from an exit event at a later juncture. Venture capital is an appealing seed funding option for start-ups because these organizations are often in a stage that is too premature to complete a debt offering or acquire a loan from a bank. A common exit strategy for venture capital firms to transform the private equity of its shareholders is a venture-capital-backed IPO. This type of initial public offering refers to the sale of shares in the client start-up to the public, which allows for the liquidation of the initial investment. An alternative method for venture capital firms to gain value from their investment in a client is by way of an acquisition from another company. In periods of slow or no economic growth, venture-capital-backed IPOs usually take a hit due to low investor confidence. The 2009 financial crisis resulted in record low numbers of IPOs backed by venture capital firms. The economic fallout resulting from COVID-19 is expected to have a major impact on venture-capital-backed IPO’s in 2020. Airbnb has elected to postpone its IPO due to a sharp reduction in its valuation this year. However, there are indications that many venture-backed funds will weather the economic storm created by COVID-19. A recent article published by Forbes details how the Silicon Valley VC Firm Lightspeed Ventures is poised for optimal performance in the foreseeable future. Venture capital is a common and appealing investment strategy in the realm of private equity. Start-ups and small businesses that can prove their worth to venture capital firms stand to benefit in the long term by selling an equity stake to these private investors. With shared incentives, start-ups and investors alike reap the benefits of sustained growth towards a model of profitability. To learn more, visit our Contact Page, or contact us directly by email at or by phone at 415-618-6060.