Difference Between Private Equity and Venture Capital

People have a lot of opportunities to start a business. In this business world, an idea is enough to bring a breakthrough in the market.

Companies which start their operation look for investors to sustain themselves in the market for a long time. Investors play a significant role in structuring a business too.

The investment in a profitable business brings laurels to the investor, and in the same way, it can also prove disastrous if the balance sheet shows a loss. This is the reason; that investors take a long time to decide whether to invest or not.

Indeed, it is the required information from the organization’s side also to furnish details about the future prediction with its business model. There must be considerable profitability for the investor to take a call.

There are many types of investors available in the industry. The two prominent terms that come to mind are Private Equity and Venture Capital. They both function similarly; sometimes, people interchangeably confuse the terms.

Key Takeaways

1. Private equity firms invest in established, mature companies to improve their performance and profitability, whereas venture capital firms invest in early-stage companies with high growth potential.
2. Private equity investments involve purchasing controlling stakes in companies and can involve leveraged buyouts, whereas venture capital investments focus on acquiring minority stakes in startups.
3. The risk profile of private equity investments is generally lower than that of venture capital investments, as private equity targets more stable, proven businesses.

Private Equity vs Venture Capital

The difference between Private Equity and Venture Capital is that in the case of Private Equity, the investments are made at the expansion stage. In contrast, in the case of Venture capital, the assets are made at the seed stage itself.

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Comparison Table

Parameter of Comparison	Private Equity	Venture Capital
Meaning/Definition	Private Equity is the investments made in companies not listed on any of the stock exchanges.	Venture capital is the financing of small businesses that are eyeing high growth in the future.
Investment Stage	The later or Expansion stage is the time when investments are made.	Investments are made in the initial level itself.
Types of Companies	Private Equity is made on companies with an excellent past track record.	Venture capital focuses on and develops start-ups.
Risk	Less risky when compared to venture capital.	It is hazardous.
Requirement of Funds	Funds are required for the growth and expansion of the business.	Funds are required for scaling up operations.

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What is Private Equity?

Private Equity is the investment of funds in companies that are not listed on the stock exchange. It is usually organized as limited partnership ventures which buy and restructure the companies through investment.

Private equity has two main components; funds and investors who directly invest in companies for their expansion. Private Equity targets private companies for investments.

At times Private equity also buys public limited companies. The funds are mobilized through an institutional or investor base or both to offer capital for a private equity fund. 

The private equity investment can be used for new acquisitions, working capital expansion, or sometimes improve the balance sheet too.

Typically Private equity fund has limited partners. They hold 99% of the fund’s shares and have limited liability. General partners own 1% of the claim and also have entire liability. 

The general partners are entirely responsible for the operation and execution of the investment. The investments are made for an extended period.

In a way, it is logical to understand that investments are required for a more extended period for distressed companies to rise to a respectable level. Private equity usually focuses on fewer companies.

 

What is Venture Capital?

Venture capital is the investment made in small businesses that aim at the future’s colossal growth. Venture capital focuses mainly on start-ups. 

Usually, the investments are made in the initial stages of the business. The main focus of Venture Capital is on operational scaling.

Venture capital takes a risk by investing in start-ups. The venture capital comprises funds and investors ambitious to sponsor new-age businesses.

Venture capital invests in many companies at a stretch to achieve a probability of success in a few as investors are sure that start-ups face very high uncertainty in the market.

Venture capital investments mostly happen in new technology-based IT firms. It starts investing from the seed level, dreaming of earning massive profits by selling the company’s shares in the future.

Venture capital acquires a minority stake, usually below 50%. And the investment range is also not so high compared to private equity investments.

Venture capital uses only money for the transaction. The model of investing small amounts in several start-ups is to wait and watch one company emerge as the best to cover the other losses. 

The same model shall not be profitable for private equity. Venture capital helps new-age entrepreneurs with initial-stage investments.

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Main Differences Between Private Equity and Venture Capital

1. The main difference between Private Equity and Venture Capital is, Private Equity investments are made at the expansion stage of the company. In contrast, Venture capitalists make the investments at the seed stage itself.
2. Private Equity funds those private companies not listed on the stock exchange, while Venture capital funds small businesses.
3. Private Equity investment is made to expand the business, while venture capital focuses on scaling operations.
4. The investor owns 100% of the company, while the stakes of venture capitalists do not exceed 49%
5. The investments from Private equity are made in a few selected companies, while Venture capital funds many start-ups.

References

1. https://www.hbs.edu/faculty/Pages/item.aspx?num=35877
2. https://www.econstor.eu/bitstream/10419/48428/1/577823078.pdf