Understanding the Differences Between Various Private Market Investors

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When you are considering growing your business, you’ll need a good business plan and likely capital to invest in the business opportunity.

In short, you’ll often benefit from advice from an investor or a founder who has ‘been there and done that’ before in different sectors and market cycles. There are many different options available for sourcing such an investor, and all are worth considering. However, as such investors become true business partners, it is important to understand the differences between various investors and to partner with a reputable investor, such as Teoh Capital.

Private Market Investors – Funds vs Founder Investors

Traditional private equity fund managers generally source money from outside ‘limited partners’, usually pension funds and endowments. These parties are prepared to invest but don’t necessarily have the time or the expertise to choose the right business. Hence the fund managers (‘general partners’) setup funds to do this for their limited partners.

As such, private equity funds are usually influenced by fee dynamics between the general and limited partners. And fund managers will usually want to realise their investment in an underlying company such as yours, as quickly as they can – usually in three to four years – so they can sell, realise their investment, and crystallise their fee. This works for some businesses, but the short hold period can be disruptive to other businesses – there may be not enough time to make the most of the market opportunity before the private equity pushes you to sell the business for good.

Private equity funds will usually invest to buy a majority share of your business and seek to influence decision making. They often seek to introduce or replace business management. The good thing is you can realise capital of your business and all your hard work – the ongoing challenge may be around what happens to your business after you do the deal.

Venture Capital

In contrast, venture capital is generally used for start-ups and companies in earlier stages of growth. Venture capital investors invest capital into businesses only, so you usually can’t get capital out yet to realise the value of what you’ve built.

Venture capital investors usually take minority stakes in businesses and are less operationally involved in businesses, partly due to investing in many businesses across their portfolio to diversify the higher risk involved with early stage growth businesses.

So, you’ll keep control of your business, but you won’t be able to realise capital out, and you won’t necessarily benefit from the investor dedicating a lot of their time to help you grow their business, since they own less and don’t have much time for each individual business in their fund.

Again, venture capital investors will often seek to realise their investment in three to six years – this time frame may or may not work for your business, but does not offer stability of ownership.

Founder Investors

There are firms such as Teoh Capital that can provide the best of both worlds. They are led by ‘founder investors’ who have successfully founded and scaled many businesses themselves. Because they are hands on by nature, they won’t seek to run your business, but they will usually be prepared to dedicate significant time to help your business grow in a strategic and operational manner.

They invest their own capital and don’t answer to outside investors, so can invest much more flexibly around time period and hold period. They are best suited to longer-term growth opportunities, including offshore expansion or pushing into adjacent markets. And because they have flexible investment mandates, they can provide both capital out to you and into the business as needed, if they like the investment opportunity into your business – best of both worlds really.

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