There are over 150 million startups worldwide. But only 10% will survive in the long run. Securing funding, building a team, and the constant pressure to scale… it all gets to be too much for many founders. That is, of course, if they do it alone. If they have some external help, their chances improve significantly.
This external help usually comes from two sources – venture capitalists (VCs) and private equity (PE) firms. VCs help early-stage startups with money and advice. PEs step in later to bring stability.
Traditionally, these two types of investors have operated separately. But now, the economy isn’t booming like before. That’s why both VCs and PEs must be smarter about their investments. This strategic approach often leads them to team up. Here’s how this superhero duo can combine their powers to turn startups into long-term success stories.
Why Should VCs and PEs Collaborate?
More VCs and PEs are working together because they have to. It’s as simple as that. Some industries have too many startups, resulting in mergers and shutdowns. By teaming up, VCs and PEs can help their portfolio companies grow stronger and survive these tough times.
But even without economic pressure, this partnership makes sense.
That’s because VCs and PEs have different strengths that work well together. VCs focus on innovation, fast growth, and shaking up the market. These are all things startups need to scale.
Meanwhile, PEs bring experience in running businesses, managing finances, and creating long-term stability. Combine these two distinctive skill sets, and you get a company that shouldn’t struggle with any development stage.
When Is the Best Time for VCs and PEs to Team Up?
Technically, VCs and PEs could partner up at any stage. However, the smartest partnerships happen at key moments in a company’s growth.
Growth Stage (Series B/C)
The growth stage is arguably the best moment for VCs and PEs to team up. At this point, a VC-backed company has proven its product-market fit. Now, it’s ready to scale. And do it aggressively. A PE can help it avoid all the common pitfalls during this stage, including the infamous “valley of death,” the period between when a company starts operations but has yet to turn a profit.
Pre-IPO Stage
An Initial Public Offering (IPO) is when a private company sells its shares to the public for the first time. Going public is a big milestone because it attracts public investors and often raises a lot of money. That’s why it shouldn’t be surprising that the pre-IPO stage can be rather challenging. The company must have strong finances, good management, and smooth operations to meet public market standards. When a VC and a PE team up, they can help get everything ready for the big launch.
Post-Acquisition Integration
After a startup gets acquired, the real work begins. It must merge with a larger company without slowing down its growth. The PE usually handles the first task. The firm focuses on blending operations, goals, and company culture. Meanwhile, the VC makes sure the startup keeps growing. Plus, innovation should never suffer at the hands of integration. The VC ensures this doesn’t happen during such a stressful transition.
How VCs and PEs Can Collaborate to Build Long-Term Value in Startups
Here’s how VCs and PEs can work together to create lasting value in startups.
Providing Funding at Key Stages
There’s one thing any startup needs to succeed in the long run – funding. In the early stages, when things get tough, and for scaling. VCs and PEs can work together to provide that crucial capital at the right times.
This happens in two ways.
One approach is staged investments. Here, each investor steps in at different points. For example, VCs usually provide funding in the early stages. As the business matures, PEs come in with additional capital to support further growth. This gradual transition allows the company to scale in a more sustainable way.
Another approach is co-investment. In this approach, both investors contribute to the same funding rounds. By sharing the risks and rewards, they build a stronger partnership. At the same time, the funding process becomes faster and more efficient.
Regardless of the method, the startup gets the right kind of funding at the right times.
Sharing Resources
VCs and PEs provide a range of resources to the companies they invest in. They connect startups with reliable legal and financial advisers, introduce them to marketing agencies, and give them access to useful technology platforms. In addition to these services, they also offer more practical support. Some examples include renting an office space and helping hire top talent. Essentially, they do anything that helps a startup run more smoothly.
Now, both VCs and PEs excel at different aspects of this support. That’s why combining their strengths is such a good idea. A VC-PE team practically plugs all the gaps and provides a full-circle support system.
Sharing Connections
Connections are undoubtedly resources. However, they are so valuable that they should be discussed separately. After all, funding isn’t the only thing every startup needs. They also need people. People to run the company, people to buy from it, people to invest in it.
It’s good, then, that both VCs and PEs usually have extensive networks of connections.
VCs typically have strong networks in the startup ecosystem itself. As such, they can help the startup hire people, find early adopters, and branch out with collaborators.
PEs have strong connections in well-established industries. This enables them to introduce startup founders to key executives and experienced operational leaders.
When VCs and PEs combine their networks, startups can scale with the right people by their side.
Crafting Joint Value Creation Plans
Creating long-term value in startups doesn’t just happen. There needs to be a clear roadmap for success. The roadmap in question is a Value Creation Plan (VCP).
A well-structured VCP will help the startup build long-term value. However, it will also keep everyone accountable – VCs and PEs. And, of course, the startup itself. Here are some parts this plan should contain:
- Clear, measurable goals
- Realistic targets with specific deadlines
- Responsibilities for every party
Managing Due Diligence
Due diligence is how investors determine which startups are worth the risk. They carefully review the company’s finances, leadership, market potential, and risks before investing.
PEs are known for their thorough due diligence. This especially applies to evaluating management teams. They conduct in-depth background checks, assess leadership skills, and ensure the team has what it takes for long-term success.
VCs focus more on the technology, product, and market opportunity. This sometimes leads them to overlook the human aspect. But in the early stages, when there’s little financial data available, understanding the founders is just as important as understanding the market.
When VCs and PEs work together, they make due diligence more effective. Together, they reduce risks, make better decisions, and ultimately improve the chances for long-term success.
Achieving Operational Excellence
Many VCs take a hands-off approach to operations, stepping in only when problems come up. But great companies aren’t built by simply fixing issues as they arise. They’re built by continuously improving processes and making smart decisions. And that’s precisely where PEs shine.
PEs bring in structured operational support to give the startup the right systems, processes, and talent. This helps them achieve the foundation of long-term success – operational excellence.
Governance is a big part of that excellence, too. Many founders view it as unnecessary red tape. But in reality, strong governance improves leadership and helps avoid mistakes. And remember – PEs are there to ensure that oversight doesn’t hinder innovation.
Developing Exit Strategies
A clear exit strategy is crucial for unlocking the full potential of a startup. VCs and PEs help ensure that the path to exit is smooth and profitable, creating lasting value for the company.
Now, these exit strategies can be planned early in the startup’s life. They might include options like mergers, acquisitions, or IPOs. Thinking about these strategies ahead of time ensures that both investors are ready when the right opportunity comes along.
Another option is bridge financing. A startup sometimes needs extra support to reach important milestones. In these cases, a PE can provide funding to help a VC-backed company exit successfully.
A Fruitful Collaboration
A partnership between VCs and PEs combines the strengths of both. While this is an attractive idea, it’s not always easy. These companies can’t just come together and expect magic to happen. The two must work together effectively – with clear communication, defined roles, and the same goals. If issues arise, both should have a plan for resolving conflicts.
Essentially, success in a VC-PE partnership doesn’t depend only on the portfolio company. It also depends on the relationship between the investors. When done right, the benefits go beyond profit. They help build businesses that last and make a real impact.
