Venture Capital vs Private Equity

There are significant differences between venture capital (VC) and private equity (PE). Venture capital firms and private equity firms consider investing in different sizes and types of businesses and their objectives, percentages, and investment types will differ. In this article, we will discuss the differences so you can find a funding solution based on your business type and condition.

What Is Venture Capital?

If you have a startup company and you think that you have the potential to progress faster and achieve long-term benefits, you can consider taking the help of venture capital. The funding can come from investment banks, wealthy investors, and Venture Capital funds. In addition to funding, you can get managerial and technical expertise. Startups will receive all the support to dominate the competition and generate more profits in the initial years.

Before investing, the investors will ensure that the company has the potential to go further and it will not deteriorate. Apart from financing, venture capital can offer more benefits and support the growth of new companies. Venture capital firms have connections and sources to enable startups to progress and make more from their businesses.

What Is Private Equity?

Private equity shares the ownership of an entity, not publicly traded or listed. Its investors either gain the control of a company or buy a major share to delist the property from the stock exchanges. A private equity firm acquires those companies suffering from poor management or financial loss. The firm restructures the debt of its acquired company and hires better skills to improve the condition.

Any company suffering from a significant loss and unable to recover can consider private equity. It will buy 100% ownership and take complete control of the company. It is a noticeable difference between venture capital and private equity. When venture capital invests in fifty percent or even less equity, private equity will take complete control.

What Are the Differences Between VC and PE?

There are many differences between VC and PE. They handle different types and sizes of companies, and the equity percentage and company status will vary significantly. Here are some differences you can go through to know how both financing companies work and when they can be the best help.

Company Age

Venture capital helps new startups when the growth potential is impressive. VC offers all the desired help to startups to generate revenue and make more from their investments. VC will not involve in financing only, but it will also provide technical and managerial support. It helps startups to find the right direction and boost earnings. You can say that venture capital focuses on young businesses and startups when they are in the early stage. They need financial and other support to progress further.

PE will consider well-established companies when it comes to financing. PE choose companies with a good reputation, but they have lost their place due to poor management or insufficient fund. PE will step in, buy complete ownership, and make operational upgrades to increase revenue.

Company Types

There will be some differences in the company type to deciding on an investment. However, these financing solutions cover a wide range of industries, varying from transportation to construction. But venture capital focuses more on biotechnology, clean technology, and technology, and PE covers a wide area and supports most company types.

Percentage

VC financing will have limited investment, less than a fifty percent share. But it ensures active participation to support proper growth. PE will purchase the company instead of having a portion. Even if PE cannot buy 100%, it will get a major share. The objective is to control the operational process of the company.

Risk Involved with Investments

Venture capital invests in many companies compared to its competitor. It buys a portion instead of the company. As a result, the risk is less, but it offers technical and managerial support to improve the earning potential of companies. 

PE makes a small number of investments, but it buys 100% shares. If PE fails to revive any company, it might lose the capital. Therefore, the risk is more when it comes to PE. However, the company targets only mature companies to minimize the risk. Also, PE focuses primarily on long-term benefits. 

Operational Involvement

A venture capital firm is involved in the operational process of a startup by advising about the right strategies to grow and become (more) profitable. But venture capital works for the company without having any control. 

On the other hand, private equity will have complete control. It will handle the operational process of the company. It will dismantle and restructure the company before acquiring it. A PE firm will try to make the assets of the company more valuable to increase the market value and generate more revenue.

Efforts

When it comes to venture capital, it follows a relationship-driven process. The company will participate in the development and growth. It will put effort into growing the company. 

PE will manage most processes, including analyzing financial statements, performing company valuations, and liaising with bankers, accountants, and bankers.

Summary of the Differences Between Venture Capital and Private Equity

Venture capital firms invest in a company when it is in the early stage of its operation. It invests in startups and takes a risk by providing financial assistance. Once the company starts making profits, it gets returns. VC supports new companies with funding, technical, and managerial help. The objective is not to acquire ownership. Instead, it wants to contribute to the growth and make money from the profits.

On the other hand, the objective of private equity is clear. PE will acquire either a part of the entire company. It will dismantle the operation process, restructure it, and bring changes to the company to regain its status. However, it will not keep ownership for a long time. PE firms will improve the company’s financial condition and make it profitable. Once the company starts making money, PE will sell the company and make more from its investments.

These are the differences between venture capital and private equity. The objectives are clear, and both want profits from their investments. However, they follow different approaches and focus on specific categories before considering an investment. When venture capital chooses startups, private equity invests in established businesses. It is a noteworthy difference between these two financing solutions. Moreover, venture capital will not buy any company, but it will monitor the operational process without gaining control. A private equity firm will buy the company and restructure it most of the time.

Which One Is Better?

If you have a startup company and you believe that your company has the potential to grow faster with the help of outside funding, you can consider going with venture capital. In addition to funding, you can expect advice and the network of the VC company to help your business. This way your startup can grow faster. 

When you have an established company and it’s hard to become profitable due to poor management or a financial crisis, you can consider opting for PE. It will buy your company or a large share and get complete control. So make sure you know your business objective and type before considering either VC or PE.