Venture capital versus private equity relationships — and how to improve both

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Private capital investors and fund managers purchase a wide range of alternative assets, and the relationships involved in these deals vary depending on which securities the buyers, sellers, and intermediaries choose to juggle. Although venture capital and private equity deals share some similarities, relationship management professionals must recognize a few key distinctions to avoid damaging relationships and fumbling transactions.

 

By learning how industry relationships compare and contrast, your group can evolve along with the latest relationship management trends and ensure you’re top of mind when profitable deals arise.

 

Private equity versus venture capital relationships

Private equity (PE) and venture capital (VC) deals diverge when it comes to the scope of the deals and how business relationships are cultivated.

 

VC deals involve capital allocated to younger businesses that exhibit potential for highly profitable growth. In exchange for committing this capital, investors receive a percentage of the business’s equity and/or profits once that growth is realized.

 

VC relationships develop quickly and can come and go without fanfare, as many VC professionals constantly seek out new relationships to augment their established ties to trusted service providers like lawyers, advisors, and intermediaries.

 

VC funds also try to exemplify what famous venture capitalist Chris Dixon calls the “Babe Ruth effect” — swinging hard and accepting that some swings will inevitably lead to big misses, while others will produce huge hits. A small percentage of deals tend to produce the vast majority of a VC fund’s success, leading VC dealmakers to sometimes neglect colleagues from previously unfruitful collaborations.

 

PE investors similarly expect to allocate funds to businesses for an eventual return. However, PE transactions are larger than VC transactions, as they involve more capital, people, regulation, steps, time, and complexity. The assets targeted for PE purchase are usually from businesses that investors believe are undervalued and can be turned around into profit-generating success stories.

 

Although PE relationships tend to be more time-consuming, the payoff is a roster of long-standing, dependable collaborators that PE dealmakers can trust. Ties within this asset class are often more complicated than the simpler, more linear, logical camaraderie within the VC industry.

 

How to improve both VC and PE relationships

In the VC and PE industries, your deal flow is only as strong as your industry relationships. Improving ties with founders, operators, service providers, intermediaries, and other investors maximizes your ability to source and execute the most profitable deals.

 

Adopt a system to manage relationship data

Don’t let your team members keep all the details of their industry relationships in their minds, email inboxes, or locally hosted spreadsheets. Liberate and secure that information as soon as possible by adopting a relationship management solution that holds deal and workflow data.

 

DealCloud is the only deal management and relationship management system built specifically for all dealmakers within the private capital restructuring market. It automatically gathers deal and relationship information from dealmakers’ activity, which teams can easily access to promote firmwide transparency.

 

Dealmakers no longer need to settle for a generic CRM that forces investors and founders to manually input, field, and label information. Schedule a demo of DealCloud to see how a firmwide system can build your group’s institutional knowledge for reliable, real-time relationship data transparency and accessibility.

 

Recognize and capitalize on increasing VC and PE relationship complexities

To improve your VC and PE relationships, start by rethinking some of the traditional ways you’ve been relating to them. High-achieving investors don’t keep to themselves or contact only the most obviously beneficial players. Today’s envelope-pushing dealmakers embrace new relationship complexities, which in turn lets them deploy the record dry powder of 2021 and exploit target sale prices. A recent World Economic Forum article also revealed that numerous limited partners (LPs) are now sending reverse deal flow to sponsor groups when an LP is unable to pursue a deal.

 

Reach out to unlikely new industry friends who can help your group become co–general partners, dabble in new asset classes, or break into a new sector to target your usual alternative asset.

 

Meet the increasing demand for more and better data

LPs for both VCs and PE firms expect more information than ever before. There are two ways to fulfill this desire for data and build relationships among your institutional investing partners.

 

Use and offer proprietary VC and PE data

Harvard Business Review (HBR) analysts say that unique-to-you data is the most valuable for building relationships. Acquisitive groups should also provide this data to partners to increase their own competitive advantage.

 

Collect insights from internal dealmakers by surveying automatically captured details in your firmwide information management system. Draw conclusions about the market based on the data, and share them regularly with investors and service providers via email or your system’s self-service investor portal.

 

You can also collect and analyze nontraditional data in innovative ways. For example, investment firms can determine how retail stores and the economy are performing by analyzing parking lots via satellite imagery. By creatively leveraging data and gaining new insights, your group can improve valuation research work in the due diligence phases of a transaction.

 

Use and offer third-party VC and PE data

To stay top of mind when your LPs have questions, leverage third-party data service providers like Cherre, FactSet, Preqin, Esri, and PitchBook. DealCloud’s own DataCortex provides an all-in-one experience by integrating seamlessly with these vendors to keep users from toggling between websites and to help users identify how the information relates from one vertical to another. DataCortex also lets users drill down and hover over details to provide a less static, report-like presentation. Instead, it puts users in the driver’s seat, expanding data points or keeping them hidden for a cleaner view.

 

Accurate, up-to-date, and comprehensive information builds trust, and trust — especially in the capital restructuring industry — builds relationships and increases reliable deal flow.

 

Improve VC and PE investment philosophy alignment

When you dismiss or table misaligned opportunities, you can focus on strengthening relationships that are better aligned with your firm and that will be profitable. Similarly, by being selective about who you work with, your partners will feel more confident in your group’s decision-making skills and in your ability to harness your strengths and specialties.

 

To ensure your deals and clients align with your firm, start by clarifying your stance on trending topics such as ESG (environmental, social, and governance) issues. Dechert’s 2022 Global Private Equity Outlook revealed that 96% of North American sponsor groups expect LPs to increase their scrutiny of GPs’ ESG philosophies. DealCloud can help acquisitive dealmakers collect, store, centralize, and analyze ESG information, as well as assemble and deliver the data to interested parties.

 

Next, learn about — and work to avoid — style drift, which can damage your firm’s reputation. Funds under management must stay true to the investment philosophy first laid out in the group’s capital raising presentations, pitch books, and road shows. Any departure from the original thesis erodes trust, which can unintentionally weaken relationships. When LPs see you stick to your investment thesis, their confidence grows and your relationships strengthen.

 

Construct the best reputation among LPs and target boards

Strong venture capital and private equity relationships are like a self-generating machine. When your group is known for handling your asset class’s complexities, providing the most and best data, and working with only strategically aligned players, the LPs and target boards you work with will remember and continue to call on your group. Other dealmakers will also learn about your reputation for being reliable and pioneering, and will come to trust you by observing your reciprocity within your network.

 

For more creative ways to cultivate fruitful relationships within the capital restructuring community, subscribe to DealCloud’s email newsletter.

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Author:

Katlyn Kohler

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