Venture Capital Vs. Private Equity
Private Equity and Venture Capital are types of financial assistance extended to companies at varying stages of growth. The initiative is to ensure these firms become sustainable and start generating revenue in the long run. One misconception is that both features operate under a similar principle. However, a more in-depth look into the protocols, aims, and strategies employed reveals a considerable difference between them. Read on.
Related: Why Many VC-backed Startups Fail
Definition
Venture capital is a type of financing offered to small companies who are just joining the market. There is a thorough analysis of business policies. If there is a potential to have high yield returns, a pool of investors join hands and offer help. Private equity, on the other hand, is financial help provided to already existing companies. The aim is to privatize the company and benefit from the revenue.
Sources Of Cash
Venture capital refers to aiding big companies. The offer is not limited to monetary terms. It can also be in the form of management. However, when offering cash aids, the money has to come from the investors. In the case of private equity, there are no limitations to sources of funding. It can come from private sources or debts.
Subject Companies
The long-term goal of private equity is to remove companies from the public eye. Investors entirely fund the firms and lead them straight into privatization. The investors also choose any company they deem fit. Their counterparts, venture capitalists, have restrictions regarding industries. Venture capital is only possible in specific sectors, including biotechnology, technology, and clean technology. They must be startups.
Growth Stage
Venture capital focuses on new companies. Such organizations must be in the early stages of development. Nevertheless, they should show signs of breaking out and surviving. Through analysis, investors note this and opt to pump in money. In the case of private equity, the point is the opposite. The course pays keen attention to already mature companies. These corporations could have been previously doing good. However, a lack of stability and economic factors makes them one step away from collapsing. Private equity prevents this from happening. Investors channel in money to bring the firm back to its feet. From there on, a share or all of the profits belongs to them.
Percentage Of Ownership
Venture capital focuses on 50% or less of the company. Investors avoid taking huge risks as, in some instances, these companies go down the drain. Therefore, they prefer to invest specific amounts in different companies so that in case the worst happens, the loss isn’t substantial. However, private equity assumes 100% ownership. Upon funding, the company gets removed from public listings. It becomes operational under private management. Both investors and companies involved take control.
Amount Invested
In the quest to avoid huge risks, venture capitalists spend a maximum of $10million.There is no assurance that the startups would materialize to their expectations. Private equity stretches up to $100 million. The companies involved already have a strong base, thus fewer chances of failure.
The two financial proceeds aim to help companies but utilizing different conditions, as seen above.
