Introduction
It is sometimes confused with venture capital as firms that invest in companies and exit by selling their investments in equity financing, for example, by holding initial public offerings ( IPOs ). However, there is a significant difference in the ways the firms involved in the two types of funding conduct their business.
Private equity investment encompasses investments in all types of companies, depending on the amount of money and percentages of claims to the equity of the companies involved. Venture capital, on the other hand, invests in different types and sizes of companies, using varying amounts of money in every deal, and claims a different percentage of equity in the firms in which VC invests.
Venture Capital
Venture capital is financing invested in new firms and small businesses that are valued for their potential high growth rates and above-average returns , typically due to some form of innovation or by developing a new industry niche. Funding of this type usually comes from wealthy investors, investment banks, and specialized VC funds. There doesn’t have to be a financial form of investment-in some cases, technical and managerial know-how can suffice.
VC focuses more on new companies, whereas PE (private equity) focuses on established companies that need an infusion of equity. Venture capital has been an essential source of financing, especially when start-ups cannot draw capital from markets, loans from banks, or other sources of debt instruments.
Professor Georges Doriot of Harvard Business School is known as the “Father of Venture Capital.” In 1946, Doriot founded the American Research and Development Corporation, which raised a $3.58 million fund to invest in firms that commercialized technologies developed during World War II.
Private Equity
Private equity refers to the investment partnerships that buy and run companies before selling them . Private equity firms operate these funds on behalf of institutional and accredited investors. Private equity funds can buy entire private companies or public companies. They can also invest in buyouts of this nature in a consortium with others. Generally, private equity funds do not hold stakes in companies that are still listed on the stock exchange.
Private equity is categorized as a form of alternative investment , along with venture capital and hedge funds. Investors in this type of asset are typically expected to commit large sums over long periods of time. As such, access to these investments is highly limited to institutions and high – net – worth individuals.
Unlike venture capital, most private equity firms invest their funds in mature companies rather than startups. The portfolio companies are managed to increase their worth or to extract value before exiting the investment years later.
Key Difference:
Conclusion
Venture capital continues to maintain interest in minority stakes during the early stages of high-growth startups and/or companies with greater risk, whereas private equity focuses on mature companies, acquiring majority control with relatively lower risk. Private equity investments typically involve more operational involvement and longer investment periods compared to those witnessed in venture capital .