Have you ever considered a private equity option to fund your start-up? If so, then you need to think again. Attracting pool of private investors is indeed an excellent way to support a brilliant idea, but not sustainable. To fully comprehend the concept, let’s have a look at what is a private equity firm.
Any business or firm that receives its funding from private investors is called a private equity firm. Such company is not a listed one, and hence its shares are not traded on a public stock exchange. Investors who buy the share of the business, charge a fee and while claiming up to 20% of the profit.
Who Invest in Private Equity Investors
Private Equity firm mainly includes institutional investors who can hold their money in non-traded funds. Most of the times, individual investors choose to buy stakes in private equity firm. They don’t look for how to invest in a stock exchange, but plan to buy a company or a part of it, without involving any share trading platform. Investors who buy equity in the new business, very often, are in a position to take over the management control. The target buyout company in return gets funding to continue its operations.
For fresh entrepreneurs, converting their start-up into a private equity firm may seem cool, but it can cause them a loss.
Private Equity Firm Can Hinder Growth
According to experts, individual investors choose for a target buyout because they look to make a profit out of it immediately. In their move to get maximum out of their investment, they may end up making growth holistic policies. For example, they often bring an incompetent management. Such companies often rely too much on operating as well as financial leverage; further, their inability to grow and innovate also leads them to quick bankruptcy,
A Brilliant Idea needs to be Cautious of Private Equity
As mentioned earlier, private equity can do a great job to bolster business. But start-ups need to be careful about choosing this source of funding. The reason is that lack of innovation and discouraging of growth and making profit-oriented policies can result in the death of an idea. In simple words, not all the private equity investors can wait for long search and development process for making a plan flourish. So, chances are high for a private equity firm to kill a potential idea.
Private Equity Firm Results in Employee Lay-offs
A private entity firm very is more likely to undergo restructuring. Such an attempt inevitably leads to massive employee layoffs. As mentioned above, such companies also discourage growth and innovation. So, no new jobs are created. Furthermore, founders who are enthusiastic at early stages due to their brilliant idea can also lose interest for an unfriendly atmosphere.
A start-up that exploits a unique idea as its foundation stone must go for the option of Angel Investor rather than private equity firm, which might appease the needs of specific businesses.