Difference Between Private Equity and Venture Capital (With Table)

Private Equity vs 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 started its operation, look for investors to sustain in the market for a long time. Investors play a major role in structuring a business too.

The investment in a profitable business brings laurels to the investor and the same way it can also prove disastrous if the balance sheet shows a loss. This is the reason; the 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 the business model it holds. There must be a considerable amount of profitability for the investor to take a call.

There are many types of investors available in the industry. The two prominent terms come to mind are Private Equity and Venture Capital. They both function the same way, at times people interchangeably confuse with the terms.

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


Parameter of ComparisonPrivate EquityVenture Capital
Meaning/DefinitionPrivate Equity is the investments made in those companies which are not listed in any of the stock exchange.Venture capital is the financing of small businesses that are eyeing high growth in the future.
Investment StageLater or Expansion stage is the time when investments are made.Investments are made in the initial level itself.
Types of CompaniesPrivate Equity is made on companies that have a very good track record in the past.Venture capital focusses and develops the start-ups.
RiskLess risky when compared to venture capital.It is highly risky.
Requirement of FundsFunds are required for the growth and expansion of the business.Funds are required for scaling up operations.

 

What is Private Equity?

Private Equity is the investment of funds in companies that are not listed in the stock exchange. It is normally organized as limited partnership ventures which buy and restructure the companies through the 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 either through an institutional base 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 and they hold 99% of share in the fund and also have limited liability and general partners own 1% of the share and also have full liability. 

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

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

Private Equity 1
Private Equity
 

What is Venture Capital?

Venture capital is the investment made on small businesses which aim at the huge growth in the future. Venture capital focusses 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 of funds and investors who are ambitious to sponsor new-age businesses.

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

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

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

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

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

Venture Capital
Venture Capital

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 while Venture capitalists make the investments at the seed stage itself.
  2. Private Equity funds those private companies which are not listed in the stock exchange while Venture capital funds small businesses.
  3. Private Equity investment is made for the expansion of the business while venture capital focuses on the scaling of 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 on a few selected companies while Venture capital funds many start-ups.

 

Infographic

Private Equity vs Venture Capital

 

Conclusion

It is ideally seen that the Private Equity model shall not be compatible with Venture Capital and also vice versa. The two are in different extremes, while private equity funds matured larger companies for expansion, Venture Capital helps new-age entrepreneurs to flourish.

Investment is a risky proposition and Venture capital way is very risky. Looking for the odds to crackdown is a nervy affair. But the model of venture capital is commendable. It supports many businesses at the same time with smaller investments. Private Equity completely restructures the organization while Venture capital helps to scale up the operations to the next level.

All the more, distressed and new businesses are getting support from investors which are highly commendable.


 

Word Cloud for Difference Between Private Equity and Venture Capital

The following is a collection of the most used terms in this article on Private Equity and Venture Capital. This should help in recalling related terms as used in this article at a later stage for you.

Difference Between Private Equity and Venture Capital
Word Cloud for Private Equity and Venture Capital

 

References

  1. https://www.hbs.edu/faculty/Pages/item.aspx?num=35877
  2. https://www.econstor.eu/bitstream/10419/48428/1/577823078.pdf
  3. https://bibliotecadigital.fgv.br/dspace/bitstream/handle/10438/13480/PRIVATE%20EQUITY%20AND%20VENTURE%20CAPITAL%20IN%20AN%20EMERGING%20ECONOMY.pdf