Many early-stage companies wonder when it is time to reach out to different alternative finance companies, such as Equity Crowdfunding (EC), Venture Capital (VC), and Private Equity (PE).
Private Equity, Venture Capital, and Equity Crowdfunding work at different stages of a company’s life cycle. When should a business approach these alternative finance company? And why is there so much confusion between Private Equity and Venture Capital?
Venture Capital and Private Equity companies constitute equity funds with the contributions of accredited investors, known as limited partners. They do so to invest in private companies and new companies.
The objectives of Venture Capital and Private Equity companies are the same: to add value to the companies in which they invest and then sell them or to add value to their shares for profit. Diversely, Equity Crowdfunding platforms perform a marketplace function by connecting investors with companies in need of financing.
Same objective, different business model
Assuming Venture Capital is part of Private Equity is possible. They both invest in companies, hire former private or corporate bankers, and generate profits from investments instead of consulting fees. But when analyzing both finance companies in detail, their significant differences can be noticed.
VC: they invest in fast-growing tech startups. These scale-up stage startups that already have a validated product, some demand, and revenue need capital to expand. These are mainly startups in initial and growth stages.
EC: business angels and Equity Crowdfunding platforms usually finance seed and early-stage phases accordingly.
PE: they usually invest in mature companies operating in traditional industries. Such companies need financing to restructure their business, to overcome stagnation, and to grow. Although the structure of PEs can vary, the most common type of transaction is the leverage back (LBO).
EC: in Spain, such platforms operate under the supervision of the CNMV. This allows companies to offer private or professional investors their financing round with a fund-raising objective and in a specified time.
VC companies never enter LBO deals. However, Private Equity companies are increasingly entering high-risk technology businesses, where normally Venture Capital companies invest. These are mainly companies and startups in growing stages. Hence, confusion arises. Equity Crowdfunding platforms, like ours, have decided to offer mature and medium-sized companies the opportunity to carry out an Equity Crowdfunding campaign prior to their listing: PRE-IPO.
Differentiated by their features
Let us take a closer look at these markets’ features.
Companies and startups to invest
- Private Equity companies’ portfolios are bought by mature and listed companies as part of their corporate development strategy.
- Venture Capital companies invest primarily in scaleup and growth stage companies.
- Equity Crowdfunding platforms usually offer financing rounds of startups in seed, early-stage and even scaleup phases.
- PE accesses companies from any activity sector. Although there are PE specialized by sectors such as retail or pharmaceuticals.
- VC focuses on technology, biotechnology, and environmentally friendly companies.
- EC offers its marketplace services to any sector of activity. However, its operation is specialized in English-speaking markets.
Percentage of share acquisition
- PE takes a controlling stake in LBO transactions.
- VC acquires only a minority stake, which is usually less than 50%.
- EC only offers up to 20% of the company’s capital that uses their platforms.
Average amounts of financing rounds
- In Spain, PE usually makes large investments, between €50M and €1,000M. While in the United States, it can be between $100M and $10,000M.
- CV investments can be up to €5M in Spain and up to $10M in the United States.
- EC rounds fluctuate between €100K and €2M. However, with the PRE-IPO rounds, it could reach €5M.
- PE companies use a combination of equity and debt.
- VC companies use only capital.
- EC only offer capital. Meanwhile crowdlending platforms offer debt.
PE, VC, and EC business models
Venture Capital companies assume many of the businesses they invest in will go bankrupt. So, their hope lies on at least one investment bringing great returns to make the entire fund profitable.
VC companies also invest smaller capital in dozens of companies, meaning that model works for them.
If said model was applied by PE companies, it would be a complete disaster since the latter has a lower number of investments but require larger capital. If a company goes bankrupt, the entire fund can be damaged. Therefore, Private Equity funds invest in mature companies, where there is 0% probability of short-term failure.
Equity Crowdfunding companies do not invest in startups or other companies. Its model is linked to the round’s success.
Why are the rules of the game changing?
When companies go public and carry out their IPO, their required equity exceeds the capacity of professional investors. Capital markets in Spain seemed to be reserved for elite businesses. That trend is changing.
In Spain, Europe, and the United States, alternative capital markets such as MAB, EuroNext, and OTC are great for companies looking for finance compared to how difficult it is to obtained financing through a bank. The requirements to be listed on such markets have become much more flexible in the last 5 years. In Europe there is a genuine willingness to create a large stock market like Nasdaq for innovative companies.
Any mature company could start its plan with a prior PRE-IPO round through the Fellow Funders Equity Crowdfunding platform, and later, guided by our Capital Markets team, be able to go public in any of the alternative markets.
This new combination EC+IPO is a great opportunity to diversify a company’s sources of financing. It also allows investors to liquidate their investments in those companies.