THE BLURRING OF THE LINES – PRIVATE EQUITY AND SOFTWARE
As hot as private equity is, and as cold as Venture Capital can be…
The funding markets are shifting, with Private Equity more interested in software/tech than in recent years (see Red Herring Private Equity / Software article ), and able to do the riskier deals that would have gone to VC’s in the past.
This is interesting on a number of levels.
From a life cycle perspective, VC’s have traditionally worked the front end, working with companies climbing the development/growth/shakeout mountain, where VC portfolio companies can benefit from VC partner expertise in building technology, deploying capital, and securing market access through dealmaking. All classic early-stage skillsets.
Private Equity has meanwhile been more about financial engineering, making mature or early-decline stage investments where the drivers of value are process improvements and cost reduction. As private equity gets more aggressive, doing smaller, earlier deals and becoming more active in technology, it creates an fresh auction environment for those deals that makes it hard for the VC’s to compete, forcing VC’s to look at earlier stage deals that promise a longer, less attractive time horizon to an exit.
It also forces private equity investors to do things they have not traditionally been good at, which include implementing messy, uncertain, early-stage value creation strategies.
In effect, this process is a rebranding of VC, pushing it as an investment class towards earlier deals, and a repositioning of PE, allowing it to be effective and to invest in earlier stage deals.
Which leads to the question - as long as capital is available and the market knows where to secure it, does it matter what name you call it?