Investing in a strategic capital firm versus a traditional venture capital firm is a very different situation. What are the key differences between these two types of firms? And how can you determine which one is better for you?
Compare to a traditional venture capital firm
Using a venture capital fund to invest in a startup can be a great way to grow your business. Venture capital firms are able to provide financing, guidance and strategic advice. In addition to providing financing, a VC can also help with human resource management, financial management, and other aspects of running a business.
Typical deals involve a $3 million investment and a 40% preferred ownership position. In addition to financial returns, VCs often provide business knowledge and connections to other investors. The preferred position can protect the downside, while the IPO and antidilution clauses can help prevent equity dilution.
Traditional venture capital firms have decades of experience in building companies. Some of the most prominent traditional VC firms include Kleiner Perkins, Sequoia Capital, Union Square Ventures, and Venture Capital Associates.
Although they are still a relatively small component of the US economy, venture capital firms have experienced a surge in investment activity over the past ten years. In the last 20 years, venture capital returns have averaged 10.9% annually.
Key differences between a traditional venture capital firm and a strategic capital firm
Unlike a strategic capital firm, a venture capital firm invests in companies at different stages of development. A strategic capital firm concentrates on financial success and strategic fit while a venture capital firm focuses on identifying startups that have the potential to grow into successful businesses.
The typical start-up deal involves a $3 million investment. The venture capital firm typically takes a 40% preferred equity position. An antidilution clause protects the investor against future rounds of financing at lower values.
The venture capital industry is gaining prominence as a major investment force across multiple industries. It provides capital to companies that are struggling to deliver products to an impatient, product-starved market. The venture capital industry must be profitable and provide attractive returns for its own participants.
A strategic capital firm will also invest in growth-stage companies. Growth-stage companies are easier to sell and may offer higher valuations and exit opportunities. As a result, many traditional private equity firms have moved downmarket into growth equity.
Investing in a strategic capital firm versus a traditional venture capital firm
Investing in a strategic capital firm versus a traditional venture capital firm has its advantages and disadvantages. In the ideal world, every investment would be successful, but this is not always the case. The investment industry needs to deliver a high return for its own participants and has to offer sufficient upside potential to entrepreneurs.
Venture capital is an important source of funding for young companies. Its returns can be impressive. But the risk is also high. In addition, VC funds have little protection if a startup fails. A typical start-up deal involves a $3 million investment for 40% preferred equity ownership.
Investing in a strategic capital firm, such as a growth equity fund, is less risky than investing in a traditional VC. This is because the fund is designed to guarantee its partners comfortable income. But the downside of lower risk is that the return is smaller.
In addition, private equity firms are more similar to investment banking than venture capital firms. Private equity firms improve operational procedures, hire new management, and restructure company debt. These firms are also better equipped to handle large-scale overhaul projects.