Private equity owners tend to squeeze customers, while venture-backed firms chase innovation
Venture investors can live with nine failures if the tenth grows 100-fold, while buyout firms need profits sooner.
Give It Up Podcast · How to Choose the Best Church Giving Platform | Kyle JenkeVenture capital firms and private equity firms both put money into companies, but they want different kinds of returns, and customers can feel the difference.
That is how Kyle Jenke, chief operating officer of blockchain infrastructure company Optimism and a former executive at WhatsApp and the payments company Adyen, explains it. He says venture investors want founders to take big swings and make big bets. They aim for a 100 times return on one company, and they accept that the other nine out of 10 may fail.
Private equity firms, sometimes called buyout firms because they buy whole companies, often using borrowed money, play a different game. Jenke says they drive efficiency by cutting costs and trying to increase how the business is valued. He said they "may be trying to get a four or five X return."
For the end customer, Jenke says it is better to be served by a venture-backed company, which offers more innovation. He says those startups stay obsessively focused on serving the customer and solving customer needs. When a company tries to maximize price and cut costs, Jenke says, that "results in a worse customer experience."
Vance Roush, founder of the church giving platform Overflow, said his understanding is that private equity also works on a shorter clock. He said he had "heard timelines like five years for" private equity to extract money from a business, while many venture investors stay in for 10 years or more.
Jenke compares the private equity pattern to boarding an airplane in coach. The airline tries to charge as much as possible while spending as little as possible on food, drinks, and service. Jenke says private equity backed companies can act the same way, charging you "as much as humanly possible while providing the minimum level of service." The best people often leave, he says, because talented employees want to innovate and build great customer experiences. Jenke adds that he is not against private equity, but "more of the value accrues to the private equity firm than to the end customer."
Questions people ask
How can a venture firm survive if nine out of ten bets fail?
A venture fund pools money to invest in many early startups. If nine lose money but one grows 100 times, that one winner can pay for all the losers and still leave a large profit. That is why venture investors push founders to try risky ideas with huge potential rather than safe, modest growth.
What does a private equity firm actually do after it buys a company?
In general across the industry, a buyout firm buys a company, often using borrowed money, and tries to increase profit by cutting costs, streamlining operations, and adjusting prices. The goal is to sell the company a few years later at a higher valuation. Much of the return often comes from efficiency gains rather than new products.
Should customers care who owns the software they use?
Ownership affects hiring, product roadmaps, support budgets, and pricing. A company rewarded for innovation will spend on engineers, design, and customer service. A company rewarded for short-term profit will often trim those same areas, so checking who owns a product can help predict how it will change.