From Pieter Welten – Prime Ventures (@WeltenPie)
For the next VEECEE event we anticipated a panel discussion. The panel participants include Martijn Kleijwegt (Founder & Managing Partner of LSP), Wout van der Wijk (Founder SeatMe & Iens – acquired TripAdvisor) and Henk Nijboer (Dutch politician of PvdA). The panel discussion is being organized under the scope of “PE (hence VC’s) Public Image Issues” and is moderated by Patrick de Laive, founder of The Next Web.
The preparation for this panel discussion reminds me of the fact that a lot of people, including friends and family of myself, often confuse Private Equity (“PE”) and Venture Capital (“VC”). I can’t blame them for that, but I believe we are very different species. I am not going to bore you with how we exactly differ. You can find thousands of articles dedicated to this subject. To me it is fairly straightforward. In my opinion PE is more a numbers driven game, whereas VC starts with the people. In VC you also need to deal with many more ‘unknowns’ compared to PE. Anyhow, let me try to explain in layman’s terms what the difference is between PE and VC. So simple that even a drunken Donald Duck who is in his closet yelling “where the F is Narnia?” can understand it. In order to do so, I put on Bob the Builder’s glasses.
Private Equity
In PE you buy an entire flat. In PE you basically have apartments occupied by tenants that are paying rent. You are familiar with the type of houses, shops and surroundings of the building. It is easier to predict cash flow generated by renting out the flats. At the same time the rent (or cash flow) can be leveraged to fund construction and such like. In order to increase cash flow, you can upgrade or refurbish the flat and potentially increase rent. You also understand that the ‘quality’ of the neighbourhood will improve due to, as an example, significant (infrastructure) investments of the local authorities. This also might have a positive impact on the rent you can charge and on the value of the flat that you eventually (might) intend to resell.
Venture Capital
On the other hand, in VC you give money to a person (i.e. entrepreneur) who wants to construct a flat on a plot of land he intends to buy. You as a VC rely on the entrepreneur to first of all construct the flat. You don’t know how long this will take and if he has sufficient funds to finish construction. Secondly, the new flat should hopefully attract new tenants at a predetermined rent (otherwise the investment makes less sense). Unfortunately, you also don’t know whether that will happen. People might find the rent too damn high, during construction the government approved a new railway next to your land (no, it doesn’t make the flat more attractive) or a couple of shootings have taken place in the neighbourhood in the meantime (‘it never happened before’). I can continue like this, but hopefully you get the point..
The Line Gets Blurry
Of course I do realize that I oversimplified, this is just a simple analogy. The point is that VC is overall much ‘messier’ compared to PE, but all in all both worlds want to make a great return on their investment by buying low and selling high. Moreover, I believe that the line between PE and VC gets blurrier. Even some of the large PE titans in the world seem to turn more and more to the world of tech. As a growth VC investor you can find yourself these days competing with PE firms. Good thing? Absolutely! I welcome more funds for entrepreneurs who I truly believe are the driving forces of economic growth and job creation. At the same time, the competitive world of VC is becoming even more competitive..