Venture capital and private equity are types of investors who invest in private companies in exchange for future profits and exchange for ownership. Most people confuse private equity with venture capital, since they refer to investing in companies and exiting by selling the investment. Here is a look at the differences between private equity and venture capital.
What is private equity?
Private equity is when firms invest in a company. As a private equity investor, your focus will be on companies that are mature and not in the growth stage. The goal of the private equity investor is to get a return on their investment.
Private equity firms invest in companies that are not publicly listed. In private equity, high net worth individuals and organizations buy a share of private companies. Investors can also invest in public companies to delist them from the stock exchanges.
What is Venture Capital?
Venture capital firms invest in companies in their start-up phases with growth potential. The funding comes from investment banks, specialized venture capital, and wealthy investors. The investment is not only financial, but startups also benefit in the form of managerial expertise.
Differences between private equity and venture capital
While private equity and venture capital seem to overlap, there are still significant differences between them. Here are some differences between private equity and venture capital.
Type of Business Invested In
Private equity investors want well-established businesses. They look for a business that is struggling due to poor processes or failing to make profits. Private equity takes on less risk but has a lower return on investment. The investor comes into the business and makes significant improvements. Venture capital investors look for companies with high growth potential. A venture investor can take more risks.
Stage of Company
Private equity and venture capital investors invest in companies in different stages. Private equity firms invest in companies that are established and have five years or more in operation. Venture capital investors, on the other hand, invest in newer companies and startups. The companies are just getting off the ground.
Private equity firms buy a majority share of the organization's shares and participate in the management. They have at least 51% which is needed for a controlling share. Venture capital firms are minority investors in an organization. They buy less equity and allow the company to maintain control.
Private equity companies buy 100% of the company while venture capitalists acquire less than 50% of the company.
Private equity investors invest in a business, improve it and then sell it. They are not interested in being in business for a long time. The exit opportunities for private equity are venture capitalists, hedge funds, entrepreneurships, and secondary funds. The exit opportunities for venture capital investors are the venture capital fund, buy-back shares, initial public offerings, and mergers and acquisitions.
Venture capital firms use equity to make investments and private equity firms use both debt and equity.
Types of Industries
Private equity companies invest in all types of industries, irrespective of the industry they operate in. Venture capital investors focus on companies belonging to industries like clean-tech, biotech, and technology.
Size of Investment
The investment size in private equity is 100 million dollars minimum and a maximum of 10 billion dollars. Venture capital firms, on the other hand, have much smaller investment size. The investment size of venture capital is 10 million dollars or less.
The above are some of the differences between private equity and venture capital. If you were looking for funding for your business, now you know which one to choose from.