PE or VC: What's in the name ?

Before working at a venture capital company, I tried for years to figure out how to quickly determine if something is a venture capital investment or a private equity investment.

Some suggested that private equity is a super-umbrella term that is called venture capital when the investment is at an early stage. However, some companies have operated for 6-10 years before they come for venture funding.

Others conveyed that Venture capital is the original term which became popular after the 2nd world war and private equity is the term coined in the 80’s after famous people like Henry Kravis invested in bigger companies.

Determining by size of the company also gets tricky, as revenue of $2 million might be considered small in a developed country but large in a developing country.

The size of the investment doesn’t work either if you base it on country. An investment of $10 million in a US based company would be considered a venture investment, but might be considered a private equity investment in the developing world.

Some professionals strictly define private equity as an LBO activity. But in developing countries like India, there is almost no LBO activity due to banking regulations, and yet billions of dollars are invested in large corporations by private equity players as equity or convertible debt. This sure looks like private equity investment, but does not fall under the LBO or MBO category.

There is also a conventional wisdom that says if a company is not yet successful but the promoter is very confident, it is a venture capital investment. Vice-versa, If a company is successful but the promoter is not that confident and wants to cash out or exit with restructuring or LBO, it is for sure a private equity investment.

Though there may be some truth in that, it’s not quite scientific enough and does not cover all investment scenarios.

So here’s my own litmus test: if a company has no additional debt (bank-debt) carrying capacity due to its current financial state, an investment in it should be considered a venture capital investment. Otherwise, it should be considered a private equity investment. This should work for companies of all size, stage and in any country.