Due to private equity investments focusing on different stages of a company, both early and mature companies, it will look at different return metrics compared to a pure VC fund.
Private equity will also finance as much of the deal as possible with debt, so it will look at leveraged growth.
It is useful to compare VC investing with private equity investing.
Typically, a private equity fund would invest in established companies.
Usually they will be generating a profit rather than being early stage.
The reasons for PE investing may vary, but the driver is to improve company's performance and generate returns within private equity.
The sources of value creation and in turn returns are derived from the company's asset value growth and cash flow generation.
Often, VC companies are too early stage to do this.
Venture capital valuation is often based on a multiple of the company's earnings, typically EBITDA.
This means that the value of a venture capital investment could increase through revenue growth or through improvements of the company's EBITDA margin, both of which would result in a higher ebitda.
If a company's not profitable or has become unprofitable, then sales metrics may also be used to assess the value of the company.
The company's valuation could also increase through multiple expansion, and this means that the multiple used to value the company at exit is higher than the entry value multiple.
A company may be valued at two times sales at entry, but by exit it sells, drivers might have improved, so it can justify a three times sales valuation.
This multiple expansion could be driven by broader economic or market factors, but could also be driven by a perception that the company was now better placed to deliver higher growth rates and profits in the future.
