Are you a startup that needs to get funding for an app?
You have come to the right place as here you will find out everything you need
to know about what funding option to choose between venture capital and private
equity.
If you look at them from afar, they are both really the same thing. They are
both funding organizations that have a lot of money to invest, and they both
invest in private companies in the hopes of making it big and landing huge
amounts of profit. But if you need to find out how to get funding for an app, and which kind of
funding is right for you, you need to delve into the details.
What is Private Equity and how does PE app funding work for startups?
Traditionally, Private Equity firms raise their capital via Limited Partners (LPs) and debt-financing, and then they look for more established privately-owned companies that have a steady stream of revenue already and invest in them. They usually fund organizations that are doing well but may need restructuring or perhaps a new management setup for optimization. Private equity firms also usually like to buy a majority stake in the company if not all of it. They like to minimize their risk in investments, even if that means that they lose out on maximizing their return, so usually, it was expected of them to invest at the tail-end of your startup stage.
However, the “traditional role” is changing, because today, there is surplus capital or “dry powder”, which is prompting more PE firms to make more investments. Another change that has occurred is that Private Equity firms have started getting more interested in middle-market organizations as opposed to established ones as was always the case earlier. This also means tech companies and those developing websites and apps are more attractive to these firms today as they even started investing in startups because they realized the potential of tech startups.
The COVID-19 situation, however, has put temporary barriers in front of the changing roles. Firms that were ready to take on more risk are thinking again about what they should do. If you want PE firms for your mobile app startup funding, you will have to have excellent forecasts and projections, and you will have to convince them that you are worth the risk.
Examples of PE-backed Startups
- Toms Shoes
- Panera Bread
- Linktree
- Cerebral
- Hyperice
- PetSmart
- Refinitiv
What is Venture Capital and how does VC app funding work for startups?
Unlike PE firms, Venture Capitalists are equity investors and they like to invest at earlier stages in the startup lifecycle as opposed to the tail-end. Sometimes, VCs even invest at the seed stage. However, they try to take smaller stakes in companies so that they can spread their risk far and wide throughout their portfolio, and they don’t attempt to be the major stakeholders like PE firms.
However, this still doesn’t mean that you walk into their office with an idea in your head and expect them to hand you the funding for app ideas that don’t have any backing. They still need to see good planning and due diligence and they need to see solid data. Since VCs want a quick exit most of the time, they want to see faster returns and they will have deadlines. This means they will often push you to deliver so that they can do the same for their investors.
The pandemic has brought VCs into a difficult spot though. They are now rightly focusing more on current investments and helping them out rather than making new ones. Also, they will now emphasize more on less risk and more profitability in startups because of how the market dynamics have changed. However, as things are returning to some semblance of normal, VCs may just be falling right back into place. In any case, you do have to prove the worth of your startup to get good funding from app funding companies like VCs.
Examples of VC-backed Startups
- Airbnb
- SpaceX
- Stripe
- Palantir Technologies
- Coursera
- Masterclass
- PlateJoy
Venture Capital vs Private Equity: What’s the Difference?
Since there is so much confusion out there because of the similarities between VC and PE, it has become increasingly difficult to draw a line between the two, especially as time has blurred the boundaries.
So what is the difference between VC and PE? The fact remains that in spite of all the confusion, the differences are quite distinct when we are talking about funding apps and especially startup apps.
1. Type of App Idea/App Company
Private equity firms tend to focus on a wider scope of industries as opposed to VC firms which usually retain their focus on the technology industry. VCs, however, aren’t limited to the technology industry.
2. Deal Size and Acquired Percentage
As a rule of thumb, VCs go for smaller deals than PEs, and they also invest in smaller amounts and don’t attempt to hold the majority or 100 percent shares like PE firms do. VCs like to diversify their risk in smaller investments and they also acquire a smaller stake in the company. Also, deal size can be relative and has changed over the years.
3. Company Structure, App Stage, and Risk Factors
Both firms use capital raised from outside sources, most likely via Limited Partners, but PE firms also use debt in addition to equity whereas VC firms only use equity. VCs invest in companies or an app at an earlier stage than PE firms who look for established apps/businesses. VCs take lots of small risks always assuming that the investment will fail but that one good investment can pull them out. PE firms usually can’t afford to take such risks because they invest big. The company structure, the stage that the app is currently in, and the risk involved, however, is changing for both the funding companies as time goes on and differences become hazy.
4. Returns
Both app funding sites/firms focus on earning returns higher than those in the market, but they do this in different ways. Private equity firms use growth, debt paydown, cash generation, and multiple expansions to gain returns. VCs on the other hand, solely focus on growth and improving the companies’ valuation.
5. App Operational Focus
It’s not usual for VC firms to become involved in the decision-making of the apps they invest in, but it isn’t unusual either. This is why the lines are becoming increasingly blurred here too, since PE firms do have a say, being major stakeholders of the apps and companies they invest in.
6. HR Strategy
Though it may not be deliberate, but it is found that PE firms hire a large number of investment bankers whereas VC firms are more diverse in their hiring processes. But this is also starting to change.
7. The Recruitment Process
The process followed by the PE big guns is a very structured on-cycle approach, whereas the VC firms and the rest of the smaller PE firms follow off-cycle recruiting. They both also look for different qualities in the candidates they assess. PE firms care about your experience with deals, your “prestige” level, and how you do on modeling tests. VC firms, on the other hand, hold more qualitative interviews. They care more about your understanding of the market, whether you can network and bring in deals.
8. Work and Culture
VC firms involve more networking and meetings and the work environment here is far more relaxed and easy-going as opposed to PE firms. The culture at PE firms can best be compared to that of investment banking. This means technical analysis, lots of coordination, and long hours.
9. Salary & Compensation
Since this depends on the fund size, employees will generally always earn more at PE firms, because investments are bigger.
10. Exit Opportunities
VCs look for a shorter and quicker exit as compared to PE firms who are in it for the long haul. VC firms want to usually make quick money, and then move on, and may quick money elsewhere.
Private Equity firm vs. Venture Capital firm: Which one is right for you?
Keeping all the differences in mind, you have to decide what stage of development you are at with your app, how much investment you need, whether you are ready to forgo a large chunk of decision making power for that investment, etc. You also need to make your forecasts and see if your app is the kind that can make quick returns or will you have to rely on growth in the long run? Once you have the answers to all these questions, you can make a more sound choice about which app funding is right for you.
- What are private equity firms looking for from App founders and CFOs?
Since PV firms are on the lookout for established companies with a proven track record, they want to see the papers that prove it. They would want to see detailed financial records and the financial history of your app from the start. In fact, the more financial details you can provide them with, the more your chances of scoring the investment.
- What are venture capitalists looking for from App founders and CFOs?
Venture capitalists are always on the lookout for companies that are constantly increasing their customers. This means they are looking for companies that are constantly growing.
VCs use quantifiable metrics such as Total Addressable Market (TAM) to calculate the return if a particular product works and succeeds. VCs need you to know your market really well.
- How can PE and VC work together for App Startup Funding?
Since VC firms invest in the startup stages more often than not, maybe you can approach and acquire VC funding in the beginning, and then move on towards PE funding when you have grown and are past the startup stage.
- How much funding do you need to develop an app?
This really depends on the kind of app you are making. It depends on so many factors. Whether you are making a native app or a cross-platform app, what stage of app development you are at, whether you need front-end developers, back-end developers, or both, how you need the app interface to be, what features you need in your app, how complex you want the features to be, etc.
These are only some of the questions that you have to ask yourself in order to arrive at an estimate. This is because all apps are different. Even all development companies charge differently, so it even depends on the company you employ.
- No matter how you raise your funds, how can Folio3 help?
How you raise your funds will always be tailored to how you operate as a company and the kind of app you are looking to make. What Folio3 can do for you is that we can partner with you to make the app in the shortest possible timeframe and facilitate you in making future projections. We will also make sure we make your app in the lowest possible funds because we know it isn’t easy to raise them. We can also get you in contact with some of the best VCs, PEs, and angel investors in town.