Private Capital fund types for founders
How capital options differ and why this matters if you're thinking about raising capital
POV: you are a founder that *may* *at some point* want to raise money for your business, and you receive 20-30 cold emails a week, that all sound like this:
"Hi x, I'm Lyndsay from big venture capital/growth equity/super mega private fund, we invest in software companies just like yours. Have time to chat?"
I get it, there’s a lot of capital out there, and fund types can sound the same to entrepreneurs. There are distinct differences between how all of these firms work that influence the founder/investor relationship and are important to consider when looking for funding. What is the difference between all of the options? Well, a lot of things, but in the interest of starting with the basics - here's a quick primer:
Venture Capital: Early stage investing. VCs write a lot of small checks with the expectation that some will go to zero and others will be breakouts that make the fund. Some 10x deals, some zeroes over a 7-10 year time period. The main bets are on the team and the size of the TAM, or total addressable market = the number of people or companies out there that will buy a product. The best companies hire quickly, land some early big name customers, and usually spend a good deal of cash. VCs often help their companies tee up future rounds of funding.
Growth Equity: "Mid-stage" startup investing, companies typically have achieved product & market fit and need to hit the gas pedal to scale quickly. Most growth investors lead rounds, make concentrated investments, and expect very few zeros. Think 5-8 new company investments each year with an expectation of tripling over 5 years. Good growth firms have deep networks of people they can recommend for hire in functional areas like go-to-market, finance, customer success, and give founders time back to drive vision & strategy.
Private Equity: Acquisition or investment in big established companies. There’s often a debt component to the transaction, and investment theses are typically focused on stability. Deal sizes are much larger than VC or growth equity and are expected to roughly double over 5 years. PE firms are typically great at managing the capital markets, providing favorable debt terms for a company and setting them up for an IPO.
In plain English, why should you care? You generally want expectations to be aligned on what everyone who shows up in your boardroom thinks you are there to achieve (more on that in another post). Are your board meetings like college reunions or like fielding questions from your in-laws at family Thanksgiving? Choosing a capital partner that is focused on companies at your specific stage will set you up well for the former.