Do you need funding for your business and you are confused between private equity and venture capital? If the answer is yes, you must continue reading this post about the difference between private equity and venture capital. The similarity between private equity and venture capital is that both kinds of investors spend their money and gain some control over the company in return. However, the level of money and ownership varies considerably.
The main difference relies on the type and stage of the business and the business goals of the investors. Moreover, the amount of money invested in a business also contributes to the difference between Private equity and venture capital investors.
The nuance difference confuses many as to which option is the best for them and how to access them. In this article, we will introduce private equity and venture capital separately. Moreover, we will explain the six major differences between private equity and venture capital. So, let’s discuss these two types of funding in detail!
Do you need investors for the growth of your business? Accountingfirms might help you by offering you bespoke business advisory services. Reach out to us!
What is a Private Equity?
Private equity is a shareholding of a giant or established corporation which needs funding or a complete overhauling of business operations to increase sales and profits. The private equity investors seek to invest in the already established, stable and matured organisations.
As the risk is higher in this type of investment, therefore, investors try to invest in mature firms to minimise the probability of the failure of a business. On the other hand, the private equity leads to the delisting of a company from the stock exchange as the ownership changes and he is responsible for all the equity.
Private equity could be a combination of debt and equity and an investor can invest in a single corporation. However, they have independence in selling a corporation later after the overhaul of business operations and management, earning a profit ultimately.
What is Venture Capital?
Venture Capital also offers investment at a small percentage of equity in contrast to private equity. Small and emerging businesses attract the attention of venture capitalists. In some cases, many venture capitalists pool their resources and invest in a business with high prospects of success and growth.
Diversification in investment is the key feature of this type of investment. The shareholders can exit at any time by selling their shares. The risk is lower in this type of investment due to investment business diversification.
Moreover, the investors in venture capital are bound to invest in biotechnology, digital technology and sustainable & clean technology and disruptive technology. Besides, they provide funds at different stages of the growth of a business to ensure the innovation maintains its momentum.
Difference Between Private Equity and Venture Capital
The similarity between PE and VC is that both of them provide funds to a business entity. However, the differences are numerous. We have listed the six major differences between private equity and venture capital. Let’s discuss them!
Type of Business
Venture capitalists invest in publicly listed and established companies to minimise the risk of failure. By investing in the already established firms, the investors can focus on the growth of the business and sell it later at a higher profit. Venture capitalists look forward to investing in fledgling start-ups. The start-up and young businesses focus on marketing the product and increasing their customer base. So, the risk is higher for the venture capitalists.
Investment Amount
The PE investors intend to invest a higher amount in the large corporations, while the VC investors invest a relatively smaller amount in the investment. The VC investors provide a small amount of investment during the different stages of a business after analysing the growth of a business.
Type of Ownership
The PE investors intend to take full ownership of a large business and VC investors are the partial owners of the business with a limited role in the decision-making process. Moreover, the VCs offer investment in return for the equity only, while the PE owners provide investment as a combination of both debt and equity.
Growth Prospects
The growth prospects are entirely different for both VC and PE investors. As the PE investors spend their money on the mature firms with a high level of growth achieved. They struggle to sustain and maintain that high level of growth and buy that business. And, make crucial changes to the technical and management levels, ensuring the business stays on the path of success and earns higher returns eventually.
On the other hand, VC investors provide funds only on the basis of the potential of a business to grow, taking into consideration different factors.
Expertise Level
Expertise level also varies between these two types of investments. The VC investors provide not only cash, but also offer management, technical and other services crucial to the growth of a starting business.
On the other hand, the PE investors are the business experts and they can utilise their own expertise and skills to support the giant company they are interested in.
Exit Strategy
The companies listed on the stock exchange are the type of companies in which the PE investors take special interest as they provide high prospects of business expansion. Once the business is on the growth trajectory or the probability of success is lower, they are likely to sell the corporation at higher profit rates.
On the other hand, the VC investors always include an exit strategy as a part of their equity agreement. They can wait if the business is not making huge profits and returns. As a result, they can adopt an exit strategy to save money.
Final Thoughts
Let’s conclude our discussion with the final remarks. The PE investors provide funds to the mature firms that are in the advanced stages of their business operations and growth levels. On the other hand, venture capitalists look for adventurous and fledgling firms at a greater risk.
Similarly, the PE investors look for greater gains, thus, investing huge money and providing every kind of support to ensure the business is successful. On the contrary, venture capitalists invest in a number of start-ups at higher risks.
Finding the difference between private equity and venture capital can help you choose the right kind of investment and you can grow your business ultimately. I hope you have learned the difference between private equity and venture capital and can take the right decision.
Let’s talk to the qualified accountants and you can find them at AccountingFirms within seconds. Grow your business with us instantly. Contact us now!
Disclaimer: All the information provided about the difference between private equity and venture capital in this article is general in nature. It does not intend to disregard any of the professional advice.