When it comes to connecting the dots between venture capital and private equity, there is a thin line that exists between the two. Although both venture capital and private equity deal with investments in different firms that are unable to raise funds from the public. The key difference between the two lies in the stage in which an investment in a company is made. Here I will try to explain the difference between venture capital VS private equity in detail.
Defining Venture Capital
Venture Capital is a loan or an investment given by venture capitalists to startup companies that show promising potential. Venture capitalists can be anyone from individual investors to financial institutions as well as banks. Venture capital firms usually provide funding to start-up businesses in exchange for equity in the start-up company. The risk factor is higher when dealing with venture capital firms, therefore, venture capital is also usually referred to as risk capital. Venture capital is more popular among high technology industries. If you want to closely look at venture capitalist there are many TV shows about how venture capitalist works.
Defining Private Equity
Private equity can be best described as a general term used to indicate a large sum of money that is collected by a number of investors. This money is then later used to gain stakes in different companies. Private equity and venture capital generally serve the same purpose. That is, they both invest the money in different firms with promising potential. However, the difference arises in the fact that private equity deals with more mature companies that are well established and stable. Whereas, venture capital is used to acquire stakes in start-up companies.
Advantages of private equity
The main advantage of private equity is that it is largely favored by companies as it provides them with the ease of liquidity rather than usual conventional methods which may include high loans. Besides this, it also offers delisted companies with a chance to experiment with new methods to increase their company’s outputs and find the one that works best for them. This way the company can figure out where to cut losses and make money.
Disadvantages of private equity
There are certain disadvantages to using private equity as well. In private equity, your control over your own business is reduced significantly. A large share of your business is given up in exchange for a large sum of money. Other than this, the involvement in your own business will also become limited. The private equity firm will want to be more involved. When worse come to worst, a private equity firm may also consider selling the business as part of its exit strategy.
Differences between venture capital VS private equity
Types of companies
Private equity facilitates mature, stable, and well-established companies. On the other hand, venture capital makes their investments in the new start-up companies with a fresh concept and good future prospects.
Types of industries
Private equity firms can invest in almost all kinds of industries. On the contrary, venture capitalists invest in firms that require heavy investment initially. An example of such industries includes high technology and energy conservation.
Private equity is less risky as compared to venture capital. This is again due to the fact that private equity invests in stable companies whereas, venture capital is usually invested in start-up companies.
Involvement of investor
In private equity, the business is completely under the ownership of private equity. Whereas, in venture capital, the ownership does not go past the 49% mark.
Number of investments made in companies
Private equity firms invest in fewer companies. On the other hand, venture capital firms invest in more companies as compared to private equity firms.
As discussed earlier, private equity firms invest in a company at a later stage. Venture capital firms invest in a company at its early stages of development.
The main focus of private equity firms is on the governance of the company. This may include all the internal and external factors that may affect the company. Venture capital firms focus on managing the company. They exercise their management capabilities to help the company move forward.
What is right for you? Venture capital vs private equity
If you are a new start-up in dire need of financial assistance, then venture capitalist is where you need to turn to. This is because venture capitalists deal with new start-ups whereas, private equity firms deal with already established companies. Below a few scenarios are mentioned which would aid you in evaluating whether to turn to venture capital or private equity.
When preparing for an interview with a private equity firm and a venture capital firm, it is important to note that both the interviews differ drastically. The only thing common among them is that they judge your background. Therefore, it is essential that you treat them both differently.
In a private equity interview, the interviewer will turn all the information inside out regarding your business. The interview will not be easy and it will be brutal in the sense that they would question and judge you thoroughly.
On the other hand, venture capital interviews are not as difficult as they are dealing with smaller companies. Therefore, the main focus of venture capitalists is to keep up relationships. Especially for early-stage startup companies, the interviews are more focused and subjective.
Evaluating the environment of private equity firms and venture capitalist firms
The working environment of a private equity firm is much similar to the working of an investment bank. It is for this reason, that private equity firms hire some of the most avid bankers who are much extreme in their profession.
On the other hand, venture capital firms are lighter and have a relaxed environment. They have people who are from diverse backgrounds. Whereas those in private equity have a financial background.
Therefore, in conclusion, it is safe to say that if you are a new start-up company and your preference is a relationship over-analysis, then the safe option to turn to is venture capital. However, if a person is trying to make money in the fastest time and is more interested in money negotiation and deals, then the right option is a private equity firm.