Investment by a venture capital or private equity investor is usually done in a form of equity financing. Compared to a bank loan, an equity investment has weaker terms in the case of bankruptcy from an investor’s point of view. In principle, the investment will not be repaid to the investor during the investment period. This means that the investor shares the business and ownership risk with the entrepreneur and management. Investors stand to profit from the investment only if the value of the company grows, and this success is measured in the exit phase.

Growing with cash flow is slow and for companies striving for fast growth, it can even be impossible. In the case of growing industries, there are usually many companies vying for a shot in the same markets. Companies that are able to accelerate their growth and invest in the future with the help of external funding can gain a definite advantage that only continues to grow year by year. This is how markets can slip away from companies that may, for example, have the best technological solution, but not enough funding to grow while operating at a loss.

With the help of venture capital and private equity investors, companies gain access to vast amounts of expertise from different fields and industries. Investors have generally invested in a large group of growth companies. Through this, they have experience and knowhow of the pitfalls and shortcuts of growth. From this familiar group of companies, it is easy to look for good operational models, practices and benchmarks for various things such as scaling to different markets. Startups often need 3 to 4 rounds of financing to accelerate their growth, and experienced venture capital investors can help their portfolio companies raise these follow-on financing rounds. Private equity investors can then again support their portfolio companies with additional financing when needed, for example in cases of larger acquisitions.

A private equity investment in a growth company usually requires that there is an internal desire for change within the company. Say, a large company wants to withdraw from a type of business that is profitable, but not at its core. An entrepreneur wants to grow and scale a company, but needs additional resources and expertise. A public actor wants to privatize an establishment. A company’s owners recognize a need for restructuring. An entrepreneur wishes to retire in the coming years. These are just examples of situations where venture capital or private equity investment can be a natural solution.

An investment by a venture capital or private equity investor can bring about the fulfillment of an entrepreneur’s dreams. Investors bring in added resources and expertise that can help the company grow larger and more valuable than without external funding – often faster than its peers.

An established growth company may be very profitable even before the investment. Through a private equity investment, an entrepreneur receives a significant portion of the company’s value as cash (or even the whole value of the company, if the arrangement does not include an investment back into the company). This can help in diversification of the entrepreneur’s wealth, as a smaller portion of his or her assets will be tied to a single company. For the owners of startups, a venture capital investment can reduce the need for other forms of funding and therefore lower personal risk.

A venture capital or private equity investor often brings along a professional governance model to the board of directors. As many entrepreneurs may not pay too much attention to board work in the earliest stages, investors can help establish good governance principles. This is also a prerequisite for later acquisitions or IPOs.