Private Equity, Venture Capital, and Angel

InvestingAttracting Investment

Yonsei UIC TADCreative Technology Management

Private Equity… and “Private Equity”

“Privateequity”

Key differences between PE (e.g. Blackstone) and VC (e.g. Kleiner Perkins Caufield)• Company Types: PE firms buy companies across all industries, whereas VCs

are focused on technology, bio-tech, and clean-tech.• % Acquired: PE firms almost always buy 100% of a company in an LBO,

whereas VCs only acquire a minority stake – less than 50%.• Size: PE firms make large investments – at least $100 million up into the

tens of billions for large companies. VC investments are much smaller – often below $10 million for early-stage companies.• Structure: VC firms use only equity whereas PE firms use a combination of

equity and debt.• Stage: PE firms buy mature, public companies whereas VCs invest mostly in

early-stage – sometimes pre-revenue – companies.

Top global players in PE

Rank Firm HeadquartersCapital raised ($m)

1 The Carlyle Group Washington DC $30,650.33 2 Kohlberg Kravis Roberts New York City $27,182.33 3 The Blackstone Group New York City $24,639.84 4 Apollo Global Management New York City $22,298.02 5 TPG Fort Worth (Texas) $18,782.59 6 CVC Capital Partners London $18,082.35 7 General Atlantic Greenwich (Connecticut) $16,600.00 8 Ares Management Los Angeles $14,113.58 9 Clayton Dubilier & Rice New York City $13,505.00 10 Advent International Boston $13,228.09 11 EnCap Investments Houston $12,400.20 12 Goldman Sachs Principal Investment Area New York City $12,343.32 13 EIG Global Energy Partners Washington DC $11,345.18 14 Warburg Pincus New York City $11,213.00 15 Silver Lake Menlo Park $10,986.40 16 Riverstone Holdings New York City $10,384.26 17 Oaktree Capital Management Los Angeles $10,147.28 18 Onex Toronto $10,097.21 19 Ardian (formerly AXA Private Equity) Paris $9,805.25 20 Lone Star Funds Dallas $9,731.81

Largest private equity firms by PE capital raised between 2008 and 2013

Top players in VC

Some of the largest VC players

2014 Early-stage investments (in millions, USD)

2014 Early-stage deal count

Assets under management (in

millions, USD Industries

#1 Andreessen Horowitz, Menlo Park, Calif. $1,020.2 50 $4,350.0 Consumer services, software#2 Khosla Ventures, Menlo Park, Calif. $809.0 45 $3,100.0 Software#3 SV Angel, Palo Alto, Calif. $736.0 47 $104.0 Consumer services, software#4 Accel Partners, Palo Alto, Calif. $721.5 29 $9,600.0 Healthcare technology, media, software

#5 New Enterprise Associates, Menlo Park, Calif

$690.7 44 $13,000.0 Energy services, healthcare devices, IT services, pharma#6 Sequoia Capital, Menlo Park, Calif. $650.3 30 $10,000.0 Communications and networking, pharma, restaurants, hotels, semiconductors, software#7 Venrock, Palo Alto, Calif $620.3 15 $2,600.0 Communications and networking, pharma, biotechnology, software#8 First Round Capital, San Francisco $606.2 34 $633.0 Commercial services, software#9 Spark Capital, Boston $542.0 18 $1,825.0 Media, software, transportation#10 Triangle Peak Partners, Carmel, Calif. $535.0 3 $516.0 Software

#11 Franklin Square Capital Partners, Philadelphia

$505.0 1 $1,100.0 Apparel and accessories, energy services, utilities#12 Kleiner Perkins Caufield, Menlo Park, Calif.

$490.0 33 $6,833.0 Commercial services, computer hardware, healthcare, media, financial services, pharma, software#13 Google Ventures, Mountain View, Calif. $462.0 35 $1,200.0 Software#14 Founders Fund, San Francisco $450.0 21 $2,369.0 Commercial services, media, pharma, biotech, software#15 ARCH Venture Partners, Chicago $446.0 9 $1,500.0 Commercial services, healthcare, pharma, biotech#16 Bezos Expeditions, Mercer Island, Wash. $426.0 6 $1,000.0 Software

#17 Lightspeed Venture Partners, Menlo Park, Calif.

$415.0 21 $3,700.0 IT#18 Thrive Capital, New York City $391.0 18 $626.0 Software

#19 General Catalyst Partners, Cambridge, Mass.

$373.0 24 $3,000.0 Software#20 Redpoint Ventures, Menlo Park, Calif. $364.0 24 $3,400.0 Commercial services, retail, software

Risk & return

• VCs expect that many of the companies they invest in will fail, but that at least 1 investment will generate huge returns and make the entire fund profitable.• Venture capitalists invest small amounts of money in dozens of

companies, so this model works for them.• But it would never work in PE, where the number of investments is

smaller and the investment size is much larger – if even 1 company “failed,” the fund would fail.• So that’s why PE invests in mature companies where the chance of

failing in 3-5 years is close to 0%.

The return?

• Returns in both industries are much lower than what investors claim to achieve.• Most VCs and PE firms target 20% returns, but

VCs have earned less than 10% returns over a 5-year period and many pension funds that invested in PE firms have also seen sub-10% returns.• In venture capital, returns are heavily skewed to the top firms: if you

think about their business model, that makes a lot of sense – invest in the 1 big winner and you’re set.

Improving operations?

• Some claim that private equity firms simply buy companies, fire people, saddle them with debt, and then sell the company without doing anything to improve operations.• More common during the LBO boom of the 1980s.

• PE firms may not always overhaul a company’s operations, but they certainly work to improve them and find ways to expand – especially when it’s a recession and there’s not much buying and selling of large companies.• VC’s should have a greater incentive to improve a company’s operations

because they’re working with early-stage companies.• VC involvement depends on the firm’s focus, the stage of the company, and

how much the entrepreneur wants them to be involved.

Special cases

• Some VCs use debt to make their investments, especially for larger / later-stage investments.• Some “turnaround” PE firms buy less-than-stable companies and

focus on operational improvement rather than financial engineering.

Who are “angel investors” and why do they exist?• Angels are wealthy individuals interested in lightly guiding the birth of companies.

• In the 60’s and 70’s, ventures typically required large-scale manufacturing, along with engineering, and sales forces.

• Ventures needed large amounts of money, access to senior executives, access to early adopters.

• Venture capitalists were expected to raise a large amount of capital, assemble a set of experienced partners, join on the board, dictate stage financing.• Lengthy diligence process with at least $3 million

• This is where angels came in…

Angel investors

Advantage of using angels:• They generally use their own money.• They don’t go on boards• They don’t need to put in lots of capital (in fact, they usually don’t want to)• They understand the experimental nature of the idea• They can sometimes decide in a single meeting whether or not to invest.

Disadvantage of using angels:• Angels do not manage huge pools of capital, so entrepreneurs need to find someone else to

fund the building of the company (as opposed to the product)• Most angels do not plan to spend a great deal of time helping entrepreneurs build the

company.

Angel or VC?

• Developed a small team building a product with the hope of “seeing if it takes”• Angel!

• Developed a strong belief in your product or your product idea and you are in a race against time to move first to market• Venture capital round more appropriate.