Difference between Private Equity and Venture Capital

Difference between Private Equity and Venture Capital

The private equity and venture capital can be the most popular and systematic ways to arrange capital fund at different stages of business. Venture capital provides the seed capital whereas private equity provides you with the growth capital. In fact, private equity and venture capital are similar in most contexts but there are some key differences in financing procedures, their risks and expectations.

In this article, I will explain the key difference between private equity and venture capital from different perspectives. But before we go-ahead let us understand what private equity and venture capital are? There are basically four phases of business whenever a company starts, grows and gradually become established in the upcoming time. The four stages of business are startup phase, early, growth and maturity phase. If you are an entrepreneur or planning to start a business or already doing business, you must have required the capital fund at some of the other stages in business.

Private Equity vs Venture Capital (Comparison Table):

BASIS OF COMPARISONPRIVATE EQUITYVENTURE CAPITAL
MeaningPrivate equity mostly provide financial assistance to the matured companies seeking for potential growth and may own up to 100% ownership in the company.Venture capital works on equity basis and assist such companies which have unique technology, software with innovative ideas having rapid growth opportunities.
Stage of FinancingMaturity StageEarly Stage
Industry PreferredAny sector such as Manufacturing, Retail, IT and FM CG etcSoftware, IT, technology, biotechnology etc
Investment Horizon1 Million - 5 Million10 Million - 100 Million
OwnershipUp to 100%Up to 49%
Risk AppetiteLess RiskHigh Risk
Focus OnProfitabilityRevenue/ turnover

Private Equity vs Venture Capital:

Private equity is the firms which pool the investors’ money together and invest or buy mostly 100% equity of already established companies seeking potential growth which currently may or may not making profits and also whose shares are not traded publicly. The private equity firms invest funds ranges 10 Million to 100 Million and their focus is on profits not on revenue. The private equity firms avail long term finance and generally exit with an IPO (Initial Public Offering) of the company.

The private equity firms also utilise their funds to buy existing companies which are currently unable to make profits and they further reconstruct it to perform better in term of revenue and profit.

On the other hand, venture capital is the companies which typically buy up to 49% shares of new and emerging startup companies having great potential for growth in future. The venture capitalists finance mostly the companies which are related to software, technology and biotechnology and focus on revenue, not on profits. As the venture capital finance businesses and startups at the initial stage which don’t have any proven track record, hence bears more risk. The venture capital assists the young, energetic and qualified entrepreneurs who have unique and innovative business ideas to turn their ideas into reality.

Difference between Private Equity and Venture Capital:

The private equity firms and venture capital can be distinguished based on the following aspects.

1) Meaning:

The private equity firms which mostly provide financial assistance to the matured companies struggling for potential growth, on the other hand, venture capital works on equity basis and assists such companies which have unique technology, software with innovative ideas and having rapid growth opportunities in future.

2) Stage of Financing:

Venture capital are suitable for any startup companies at the early stage of business as they provide funding on equity basis and the entrepreneurs don’t have to take interest or performance (profitability) burden, on the other hand, private equity is suitable at the maturity phase ie. when the company has already been established and making some profit as well because the company now require a huge fund to expand further and the private equity firms ready to invest such amount.

3) Industry Preferred:

The private equity prefer most the companies belonging to manufacturing, retail, IT and FMCG industry intend to stay longer with the company, however, venture capitalists prefer the companies related to technology, software, Biotechnology etc.

4) Investment Horizon:

The private equity firms invest funds with high scale typically from 10 Million to 100 Million whereas venture capital invests the funds up to 5 Million as they finance other hundreds of such companies together.

5) Ownership:

Private Equity mostly owns 100% equity of an already established company which currently may or may not make a profit, however, venture capitalists own up to 49% equity as they intend to exit by selling their equity to other investors.

6) Risk Appetite:

Private equity firms don’t bear the risk at all, they focus more on consistent profits instead of focusing on turnover, however, venture capitalists are ready to take risks because they finance the companies with high growth opportunity and ready to exit with the enhanced valuation of the company.

7) Focus On:

The private equity firms focus on compound annual growth rate (CAGR) and profitability as well whereas venture capital focus on turnover, growth and at the same time they also focus on management and internal affairs in the company.

Conclusion:

Hope you would have understood the difference between private equity and venture capital. In a nutshell, we can simply conclude the article as, the private equity is those investors who finance such companies which are already established and seeking for capital for further growth, on the other hand, venture capital provides financial assistance to those industries or startup companies which are at their initial stage but have huge and exponential growth potential.

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References: private equity vs venture capital Investopedia  (source)

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