Let’s talk about start-ups. Venture capital vs private equity, what’s the difference?

It’s always good to talk about growth and, when start-ups are involved, it can be a very interesting subject. But what happens when the need to switch from start-up to upstart arises? The switch can be difficult but it’s precisely this issue that start-ups must face after getting through the first phase of advance funding.

Initially, the founders of start-ups are often enthusiastic and full of energy. The have fantastic ideas that appear to be groundbreaking and exciting, which attracts a lot of attention. Starting up a company is relatively easy.  The real challenges that transform that company into a successful business come later. In order to thrive, you need the right strategy and structure and must be prepared to take difficult decisions.

It is precisely this phase that is perhaps the most delicate and also the one least followed. What could be done or what do you then do to intervene in the subsequent phases of growth?

Many venture capitalists are happy to invest in numerous start-ups in the hope that some of them may be successful and offer extraordinary returns. The principle of diversification, mixed with game theory, rules. But maybe that’s not enough and an extra effort is required, together with a greater involvement in the companies by investors, support and a guiding hand for start-up companies through the increasing problems of business, but above all someone who can provide all the experience and skills required to guarantee their success.

This is where private equity funds come in. They approach these companies with different criteria to those applied by their venture capitalist “cousins”.

When an increase in capital is planned you must have a clear understanding of the type of company you’re dealing with. Indeed, there are companies in difficulty with a business that is already consolidated that require a gentle nudge or others with a promising business and an excellent competitive advantage but with orders that they are unable to fulfil.

Although the great difference may lie in the age and experience of the firm, it’s also true that these characteristics in some cases cannot be a discriminating factor. More specifically, there are some companies that have a history behind them but are incapable of being productive because they are struggling with cash flow and are unable to support potential orders or expansion plans.

So could a private equity fund be interested in a young company? Most certainly, yes. What is defined as the late stage in a start-up is very similar to the strategy of investment in private equity. It’s always also worth assessing these situations, analysing them in depth and understanding the dynamics involved.

Today’s most promising sectors show characteristics of stability determined by the life cycle of their products, which in these cases tends to be longer and easier to assess.

The venture capital sector certainly requires greater effort by the private capital system in that the difficulty of accessing credit, particularly for young companies, is obvious. In the absence of structural measures, it is to be hoped that this gap will gradually be filled over time.