Discover whether you have what it takes to thrive in the Venture Capital or Private Equity world.
I recently spent a day at a Venture Capital (“VC”) event and one day at a Private Equity (“PE”) conference. Both events were for CEOs. Even though I am very familiar with both VC and PE, having worked in both areas, I felt like I was walking into a different world when I entered the PE conference. The more obvious observations were that the CEOs were mainly white, male and in their 40s or 50s. The energy felt different – more serious, grown-up, down to earth and with quiet confidence. The topics discussed included strategy, operational efficiencies, macro-economic environment, AI and exit maximisation.
At the VC event, there was a more diverse mix of CEOs – gender, ethnicity and age – still not where it needs to be but a healthier balance than at the PE conference. The energy was more frenetic and less serious with a big dose of bravado/BS running around the room. The topics explored included product market fit, go-to-market strategies, fundraising and professionalisation of the leadership team.
This experience got me thinking (admittedly not hard for me as I generally think, or overthink, for 18 hours or more a day!) about the similarities and differences between the two worlds, the life of a CEO within each area (covered in this essay – Part I) and what the two industries can learn from each other (see my next essay – Part II).
Why am I well-placed to write about this topic? I coach and mentor CEOs of both VC and PE-backed businesses, I have founded and built VC and PE firms, I have raised capital from and have sold businesses to and I am an investor or LP in both VC and PE funds.
The Similarities And Differences Of Private Equity Vs Venture Capital
Here are the similarities.
The main objective for both PE and VC is to make good returns for their investors (Limited Partners) and themselves (General Partners). They both invest in private companies and look to sell or exit them at a profit within a set time limit. Usually, the money raised from investors is pooled into funds and invested in multiple different companies thereby spreading the risk.
And here are the differences:
- Few vs Many Investments. PE funds invest in a few companies and can’t afford to lose money on any investment. VC funds on the other hand buy more lottery tickets (i.e. invest in more companies), expecting to lose money on the majority of their investments and make big money on a few
- Profitable vs Unprofitable. PE funds generally invest in mature and profitable businesses whereas VCs invest in early stage unprofitable companies with high-growth potential
- Majority vs Minority. PE usually own the majority of a company (i.e. have control) compared to VCs who take minority stakes and don’t have control
- Existing Shares vs New Shares. PE firms usually buy existing (secondary) shares (i.e. money goes out to shareholders) whereas VCs generally invest in new (primary) shares. This means that companies taking on VC money receive money into the business to help them grow. PE-backed companies will use the internally generated cash to grow the business
- Solo vs Syndicate. PE firms usually act on their own whereas VCs often invest via syndicates with other VCs
- Active Portfolio Management vs More Passive. PE partners spend a lot more time with the businesses they invest in than the VC partners because they look after fewer companies and they look to maximise returns on all of their investments
- Traditional Sectors vs High Growth. PE firms invest in more ‘traditional’ sectors (e.g. real estate, infrastructure or manufacturing) vs VCs who generally invest in high-growth sectors like tech or biotech sectors
- Leverage vs No Leverage. PE firms use financial engineering including taking on debt to increase their returns. Unprofitable VC-backed businesses are not able to raise debt
The similarities and differences I have listed above are the norms but there are many variations and exceptions to the rule. And in recent years there has been some blurring of the lines between PE and VC – more on that another time.
Life Of A CEO Running A VC-Backed Business
A CEO at the helm of a VC-backed company typically navigates a dynamic, high-growth environment. The primary focus is on rapid scaling, innovation, and capturing market share. These companies are often in their early stages, where they are developing new products or entering new markets.
Here are some of the key areas the CEO at the helm of a VC-backed company typically needs to navigate.
No Looking Back!
Whether you are bringing on PE or VC money your life as a CEO will be forever changed! It’s like a marriage – fairly easy to get into but really hard to get out of.
It concerns me how naive many founder CEOs are about the realities of taking on VC money (NB the CEO will usually be one of the founders of the business). It may feel great to breathe life into your business through institutional money but the work has only just begun. You have now signed up for a growth plan which whether you like it or not, you need to pursue relentlessly.
You Need To Learn Very Quickly To Be A Leader
I would argue that life as a CEO of a VC-backed is harder than a PE-backed business. I have seen more burnout from VC-backed CEOs than from PE ones. Why? Most PE-backed CEOs have gone through decades of learning and developing their leadership skills whereas the CEO of a VC-backed business is often leading for the first time and has to learn to be a CEO at the same time as growing the business.
And if things are going well your role as a CEO rapidly evolves and it will feel like you need a whole set of new skills every 6 months to keep up.
The path of a VC-backed company is often uncharted and volatile. Pivoting is commonplace i.e. a change of business models. This contrasts with a mature PE-backed business where the main objective is to replicate what has already been established.
Quick Imperfect Decisions
The CEO must be super adept at making quick decisions with imperfect information. In many ways you have less to lose as you have not got anything of real substance – fewer employees, less money raised, fewer customers – and so it’s easier to make quick decisions.
Perfectionism doesn’t have much place in a start-up. Getting 7 out of 10 decisions right is better than slowing down to try and get to 8 or 9 or 10 out of 10.
Fostering innovation in a VC-backed business is a critical task for a CEO, especially since venture capital investors often seek disruptive, scalable, and high-growth opportunities.
That being said, innovation is second nature to many founder CEOs as they are creating something from nothing – innovation will be in all areas of the business including product development, go-to-market strategies, business processes etc. An early-stage business will have a culture of risk-taking, experimenting, acceptance of failure, learning and iterating.
It’s not a question of how much time and resources you allocate to innovation, it’s all or nothing!
Growth, Growth, Growth
The over-exuberance of investors during 2019-2021 is over. VCs are not just focusing on your growth path but also your path to profitability. That being said the main objective of a VC is to find the big winner, the Unicorn which is valued at $1 billion or more.
In the beginning, you will be the VC’s favourite new hope and hopefully get lots of useful attention and help. But as soon as you fall behind on the growth goals you will lose your status as the favourite child as focus switches to the new shiny growth opportunity. A bit harsh on the VC industry but unless they find the big winners they won’t make the necessary returns for their investors and there won’t be another fund.
Fundraising and Investor Relations
This is another reason why I think being a CEO of a VC-backed business is harder. You are relying on external funding for your cash flow, not internally generated profits as in a more mature business.
A significant part of the CEO’s role is to engage in continuous fundraising activities. This includes pitching to new investors, managing relationships with existing backers, and negotiating terms for new rounds of funding. Maintaining transparent and frequent communication with investors is critical.
Building A Leadership Team
Rapid scaling necessitates the need to hire quickly and efficiently. The CEO spends considerable time recruiting key talent, nurturing a company culture that attracts and retains top performers, and building a leadership team that can execute the vision.
Life Of A CEO Running A PE-Backed Business
CEOs of private equity (PE) owned businesses usually manage more mature, established companies. The focus is on operational efficiency, profitability, and preparing the company for a successful exit, which could be a sale or IPO.
In general, a CEO of a PE-backed business will be an experienced leader. It may well be their first CEO appointment but they are likely to have led a division and/or have had success in some kind of leadership role. PE firms want to minimise risk across all areas including leadership appointments and so ideally they bring on board someone who has been there done it.
One of the surprises for new CEOs in a PE-backed business is the pace PE firms demand. It is not an environment for the faint-hearted who are looking for an easy life! The financial rewards in particular can be life-changing but it’s not going to be an easy ride – it’s high pressure.
Upon investment, PE firms like to begin implementing changes almost immediately. They often come with a pre-formulated strategy based on thorough due diligence.
The PE approach typically involves a continuous cycle of assessing, implementing changes, monitoring results, and making further adjustments. This cycle is much faster and more relentless compared to non-PE-backed companies.
PE firms closely monitor their portfolio companies – they are results-focused, financially focused and data-driven. There is a strong emphasis on creating substantial value within a relatively short time frame (typically 3-7 years).
This approach can be highly effective in transforming companies, but it also places considerable pressure on the company’s leadership and resources to meet these ambitious goals.
Focus on Value Creation And Preparing For Exit
From the onset, PE firms plan for an eventual exit (sale, IPO, etc.), and this exit strategy influences the pace and nature of changes. A value creation plan is created from the get-go and tied into the company’s strategy. Companies are groomed to be attractive for acquisition or public market debut, which necessitates rapid improvements and visible success.
A well-established business naturally has structure and processes i.e. operations of the business. The efficiency of these operations will be key to profitability and value creation. PE firms when buying a business will try to find these efficiency improvements in due diligence but often they don’t find out the real truth until they have made the acquisition.
The CEO of the newly-backed PE business is likely to dive into various aspects of the business including supply chain, production, procurement, and administrative functions to streamline processes, incorporate technology, and optimise resource allocation to reduce costs and increase productivity.
Focus On Cost Management
Closely related to operational efficiencies is cost management. A larger business has the opportunity to leverage economies of scale that a smaller business simply can’t do.
Rigorously managing costs by negotiating better contracts, reducing overheads, and optimising resource allocation will be a big part of the leadership team’s role.
Organisational restructuring may be on the cards. This may involve consolidating roles, flattening hierarchies, or realigning teams for better workflow and communication.
Robust Financial Management
As the CEO of a private equity (PE) backed business, establishing robust financial management is essential. PE firms typically prioritise strong financial management and value creation, and as a leader, you’ll need to align with these priorities.
Here’s what a CEO will need to do regarding finances:
- Establish stringent financial controls to monitor and manage the company’s finances
- Develop comprehensive financial reporting systems that provide real-time insights into the company’s financial health
- Carefully manage the company’s debt profile. Understand the terms of any debt and ensure that the company is in a position to meet its obligations
- Allocate capital efficiently to ensure high returns on investment
- Ensure robust management of cash flow
- Develop a strategic approach to tax planning to ensure compliance and optimise tax positions
Managing Stakeholder Relationships
CEOs of VC- and PE-backed businesses need to keep in regular contact with their investors but it’s different in PE. As I’ve mentioned, PE firms do not want to lose money on any investment they make; therefore, they spend a lot more time with their portfolio companies than their VC counterparts.
Also, PE firms usually own the majority of the business and are in a much stronger position to get rid of you! 73%% of CEOs of PE-backed businesses get replaced during the investment cycle according to Alix Partner’s research.
Different PE firms will have different communication requirements, you must establish early clarity and alignment about meetings and communication expectations.
The Winners Will Be The ‘Both/And’ Thinkers
On reading this essay you may conclude you are better suited to one world more than the other. Is it the tumultuous seas of high-risk innovation in the VC world? Or do you prefer the disciplined currents of strategic growth and operational efficiencies in the PE world?
My challenge to you is to embrace the ethos of both worlds to create a hybrid model of leadership that is versatile, resilient, disciplined and forward-thinking.
Why? Because PE-backed businesses can’t rely on rinse and repeat anymore – the world is changing so fast that if you are not innovating you will be killed. And because VC-backed businesses can’t just rely on growth for growth’s sake, they need to incorporate strategic, financial and operational discipline alongside their experimental mindset.
Ultimately businesses, whether they are VC- or PE-backed, operate in the complex world, not the complicated or predictable world, which means there is no linear approach or one playbook to success. The leaders who are more likely to win will be the ones who can apply not an ‘either/or’ mentality but a ‘both and’ mindset where paradoxes are accepted, opposing ideas are appreciated and there is a desire to identify how they can be linked and synergies created.
Rather than asking, “Should I choose Explore or Exploit?” ‘both/and’ thinkers ask, “How can I accommodate Explore and Exploit?”. Create an Ambidextrous Organisation which embraces both the exploitation of existing capabilities for profit and the exploration of new opportunities for growth.
“The leaders I have studied share at least one trait, aside from their talent for innovation and long term business success. They have the predisposition and the capacity to hold two diametrically opposing ideas in their heads. And then, without panicking or simply settling for one alternative or the other, they’re able to produce a synthesis that is superior to either opposing idea.”