Is private equity right for your business?

Most companies seeking venture capital (VC) private equity (PE) investment are start-ups, or new businesses offering investors a potentially high return.

Common uses of PE funding include:

• launching a new product
• exporting goods or services to new markets
• recruiting senior employees
• selling part or all of a business
• taking over another business

How entrepreneurs can attract private equity investment

Most entrepreneurs will need some form of private equity investment to launch their businesses. To attract interest from PE funds, you must be prepared to:

• make sure the business is well organised
• assemble a talented and loyal team
• give up part of your business to investors
• have ambitious growth plans
• share important decisions with major shareholders
• prove your business has a competitive advantage over your rivals
• agree an effective exit strategy for investors

Find the right kind of private equity funding

There are various forms of PE funding for different phases of a company's development, eg:

• Seed financing - funding while you research and develop a project or concept until you are ready to launch a company. This form of PE is mainly provided by business angels - see business angels.
• Start-up financing - to help you develop a product and begin marketing it. This sort of funding is often based on your business plan and VC investors may often join your company to help bring the product to market.
• Post-creation funding - capital used to finance manufacturing a product and a sales drive, so your company can begin to make profits.
• Expansion and development - investment is used to increase production capacity and sales activity, for companies growing strongly.

Transfer or succession funding

Transfer or succession funding is a form of VC investment used to finance management buy-outs or buy-ins - eg after the retirement of a company's founder or chief executive officer.

It can also be used when:

• a large company sells off a business unit
• investors buy shares in a family firm
• investors from earlier stages of a company's development exit the business

VC fund managers attract transfer funding by creating a holding company - using it to seek funds, in the form of debt, to buy the target business. Once this has been done, they use the target business' dividends to pay off the debt.

Alternatives to private equity funding

You may find that other forms of funding are better for your business than VC funding such as loans and overdrafts or government support - see business financing options - an overview.