Private Equity vs Venture Capital
Venture capital and Private equity are similar in concept; in that, they both represent a form of capital that is contributed in order to facilitate growth in the company that they are being invested in. However, venture capital and private equity are very different types of capital and are used in different scenarios. While private equity investments are made in just a few companies, venture capital investments are usually made in a larger number and better diversified set of companies. The following article clearly explains each form of capital and outlines their differences.
Venture Capital
Venture capital is usually the startup capital that is contributed to companies with high growth potential and high risk. Venture capital is very important for small start-ups that do not have access to other forms of capital that may be obtained through selling securities in financial markets or bank loans.
The investment in a start up by venture capital investors is quite risky with high probability of failure. However, the firms to be invested in are chosen carefully and represent exceptional growth prospects (which may be due to the introduction of a new and innovative product or solution to the market) and represent a possibility of making exceptional returns in the case that the company succeeds.
The venture capital investor will hold a portion of the equity from the companies that investments are made in, and will be entitled to shares in the company in the event that it decides to go public by selling its shares on a stock exchange.
Private Equity
Private equity is the capital that is invested in private companies by individual or institutional investors. Private equity may also be referred to as the private funds that are invested in buying a public firm thereby de-listing it from the stock exchange.
Private equity funds also undertake leveraged buyouts where debt is issued to gather funds to buyout a public firm. These public firms are privately acquired through buyouts so that they can be turned around, and finally sold to another firm or publicly listed.
The investment made in a private company needs to be committed for longer periods of time, and therefore, are usually made by wealthy individuals or institutional investors.
Private Equity and Venture Capital
Private equity and venture capital are both forms of capital that are invested in firms with aims to make profits. Venture capitalists usually invest in quite risky start up businesses whereas private equity investors tend to invest in more stable and established firms. Venture capital investors will have to wait for a longer time to obtain a return on their investment as it takes longer for a small start up to make sizable profits. The waiting period for a private equity investor will be shorter since the investment is made in a more stable, mature and established firm.
Summary
Private Equity vs Venture Capital
- Venture capital and Private equity are similar in concept to each other in that they both represent a form of capital that is contributed in order to facilitate growth in the company that they are being invested in.
- Venture capital is usually the startup capital that is contributed to companies with high growth potential and high risk.
- Private equity is the capital that is invested in private companies by individual or institutional investors.
- Venture capitalists usually invest in quite risky start up businesses whereas private equity investors tend to invest in more stable and established firms with lower risk levels.