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The game inside the game: PE vs VC
Breaking down the different stages of private market investing
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Private Equity and Venture Capital are often used synonymously. Both invest in private companies whose shares are not publicly traded on exchanges. However, VCs generally invest earlier in a company's lifecycle than PE.
If we go one level deeper, we can categorize private market investors into general stages:
Angel: Individuals or groups of individuals
Seed: 1st institutional check
Growth: Series A through C
Late Stage / Crossover: Series C through IPO
Buyout: Majority control, Debt financed
Each stage comes with a different set of investment criteria and return expectations.
Note: There IS OVERLAP. Many of the firms listed below play in multiple arenas. Someone in the Angel camp may follow on in a Growth stage deal; someone in the Cross Over bucket may preempt a company at the Growth stage. The buckets are not mutually exclusive.
For example, Sequoia, a prolific Seed stage investor, worked its way through to the opposite side of the spectrum, now participating in Cross Over and even select Public Market opportunities. Shooters gunna shoot.
With that, let’s break down the game within the startup game.
Angels give support to start-ups at the initial moments and when (most) institutional investors are not prepared to back them. They may be families, friends, or former colleagues of the founders. They usually invest when a company is trying to go from PowerPoint to reality.
💸Check Size: $10K to $250K
⌛️Holding Period: 8 to 10 years
💰Target Return: >75% IRR or +10x
Seed-stage investors are usually the first institutional check into a company. Capital is typically used for market research, product development and business expansion. At this stage the R&D team gets a makeover and the first full-time sales and marketing people might be hired.
💸Check Size: $250K to $2M
⌛️Holding Period: 6 to 8 years
💰Target Return: >60% IRR or +10x
Growth investors typically participate in Series A, B, and C rounds. They pour fuel on the fire once product-market fit is established. This is when a company is scaling its go-to-market engine for exponential growth. Investors are more accepting of cash burn at this stage, encouraging the company to spend ahead of profits to capture a market opportunity.
💸Check Size: $10M to $50M
⌛️Holding Period: 5 to 7 years
💰Target Return: >40% IRR or +7x
At this stage in the startup lifecycle, investors look for companies that demonstrate efficient growth and are marching towards a sustainable long term financial profile. Proceeds may be used to transform from a single to a multi product company, and maybe even expand sales internationally. Investors often use this stage to build starter positions so they can double down at IPO.
💸Check Size: $50M - $150M
⌛️Holding Period: <5 years
💰Target Return: ~25 to 35% IRR or +5x
Late Stage / Buyout
This is when investors buy the entire shebang, usually incorporating a heavy dose of debt. Their goal is to make the company more efficient, mark it up, and flip it for a multiple down the road. Buyout flavors include LBOs (leveraged buyouts), Take Privates, Rollups, Platform plays and HoldCos. Free cash flow is required to pay down any debt the company takes on, calling for a very different financial profile than companies burning red at the Growth stage.
💸Check Size: Depends on strategy, but could be hundreds of thousands to billions (see: Anaplan, Sailpoint)
⌛️Holding Period: 3 to 5 years
💰Target Return: >18% IRR or +3x
What I’ve Been Reading Lately:
I recently became obsessed with Liberty’s Highlights. It’s written from the intersection of finance, technology, and the liberal arts.
Liberty focuses on the “So What” of all the developments in the fintech ecosystem. What I like most is the artistic overlay of historical and pop culture moments.
Plus, it’s written in a voice that makes NVIDIA chips entertaining (hard to do). Support your local newsletter writer and give it a go.
Quote I’ve Been Pondering:
“I like to look at sacrifice as a forest burning down. Fires are messy, dangerous, and even catastrophic. But they’re essential for clearing the forest of dead underbrush and preparing it for new growth”
-Ryan Hall, Olympic Marathoner, Run the Mile You’re In
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