In the past blog, I noted a couple of different flavors of private equity. Now, I want to discuss the most complicated category of PE investing which is the point in the life of the company when the investment is made. This would include anywhere from seed stage investments, all the way to investing in “dead” companies, and everything in between.
SEED STAGE OR ANGEL INVESTING
“Seed” stage or “angel” investing is throwing money at a company that is just getting started. In fact, it may just be an idea on a paper napkin.
Frequently, angel investors band together to create angel groups in which many individual investors invest as one. There are many of such “investing clubs” in any region and, generally, they do … a terrible job.
In reality, seed investing is simply a place for some older, financially successful folks to talk about new companies and why they think they are good or bad – generally in a pretentious way. Rarely does money change hands. There are no jobs in seed investing, so don’t worry about it.
In “venture capital” or VC, the investment is made into an ongoing concern – a company that is somewhat formed and may even have some revenue. So, venture capital is a type of private equity (one pet peeve of mine is when people say they want to go into “private equity or venture capital,” venture capital is a type of private equity, so you don’t have to say it twice.)
Think Andreesen Horowotiz (Facebook, Groupon, Twitter, and Zynga … Yikes!); Founders Fund (Peter Thiel, Sean Parker; great investors but some wacky partners); or, Venrock (The “rock” part is the Rockefeller family who have been doing venture investing since 1938. From Eastern Airlines to Dollar Shave Club nobody has done it longer or better).
While you may want to get a job in venture capital post-MBA, be warned; you generally need to have a history of starting a company yourself, be part of a venture-backed startup, or have some really unique knowledge of an industry. Even an MBA from a top-ranked program doesn’t buy you much in the world of venture capital.
When applicants say they want to go into PE they generally mean growth equity.
In fact, when you think about big private equity firms, they are generally growth equity firms. These firms make investments in companies that have revenue but need more money to accelerate growth, to make it more efficient or to navigate some bumps in the road.
These are the big dogs: Carlyle Group, Bain Capital, and one of the largest, TPG (I still know it as Texas Pacific Group which shows how old I am). These are the firms that send a lot of their junior staff to get top ranked MBAs and then hire a lot of MBAs, relatively speaking.
You are more likely to get a job at one of these firms later in your career, once you have done a few years in industry.
Later stage investments, that involve either more money to keep the company on the right track (sometimes called mezzanine financing) or stages whereby private investors actually buy up all the shares of a public company and take the company private.
This could include companies that private investors think are more valuable than their stock price indicates. Examples include Dell Computer which was taken private by Michael Dell and a number of PE firms or more recently Keurig Green Mountain, the coffee maker which was taken private for $13.9 billion. The idea that the company that makes those little coffee machines would be worth ~$14 billion sounds insane but what do I know.
“Vulture capital” is essentially private investors buying a company that is performing poorly or is bankrupt. As it implies, vulture capital can be very “bloody” in that companies are smashed apart to pull out its assets, or make them more “operationally efficient” by firing everyone.
Depending on whom you ask, Mitt Romney was either one of the greatest private equity investors of all time or the ultimate vulture capitalists. I guess the answer depends on if you were an investor or an employee. Just a point of reference, one of the early Bain Capital funds had an annual return of over 100% per year for something like seven years. That’s like winning the lottery.
Hopefully you can now answer the question of what type of private equity do you want to get a job in. Articulating a specific type of private equity makes you a lot more credible to the MBA admissions committee.
Also, don’t be intimidated by the world of private equity. Your duties are generally not particularly different from other places you can land a post-MBA job (like consulting, investment banking, or industry) and your pay is likely to be about the same, if not lower. And never think PE folks are smarter than you.
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