Private Equity vs. Venture Capital: An Overview

Private equity is sometimes confused with venture capital because both refer to firms that invest in companies and exit by selling their investments in equity financing, for example, by holding initial public offerings (IPOs). However, th𒀰ere are significant differences in the way firms🗹 involved in the two types of funding conduct business.

澳洲幸运5官方开奖结果体彩网:Private equity and 澳洲幸运5官方开奖结果体彩网:venture capital (VC) invest in different types and sizes of companies, commit different amounts🍷 of money, and claim different percentages of equity in the companies in which they invest.

Private Equity

Private equity, at its most basic, is equity—shares representing ownership of, or an interest in, an entity—that is not 澳洲幸运5官方开奖结果体彩网:publicly listed or traded. Private equity is a source of investment capital from 澳洲幸运5官方开奖结果体彩网:high-net-worth individuals and firms. These investors buy shares of private companies—or gain control of public companies with the intention of taking them private and ultimately 澳洲幸运5官方开奖结果体彩网:delisting them from public 澳洲幸运5官方开奖结果体彩网:stock exchanges.

Large institutional investors dominate𝔍 the private equity world, including pension funds and large private equity firms funded by a group of accredited investors.

Venture Capital

Venture capital is financing given to startup companies and small businesses t♒hat are seen as having the potential to generate high rates of growth and above-average returns, often fueled by innovation 🅺or by carving out a new industry niche. The funding for this type of financing usually comes from wealthy investors, investment banks, and specialized VC funds. The investment does not have to be financial, but can also be offered via technical or managerial expertise.

Investors providing funds are gambling that the newer company will deliver and will not deteriorate. However, the tradeoff is potentially above-average returns if t꧙he company delivers on its potential.

For newer companies or those 🐻with a short operating history—two years or less—venture capital funding is both popular and sometimes necessary for raising capital. This is particularly the case if the company does not have access to capital markets, bank loans, or other debt instruments. Aﷺ downside for the fledgling company is that the investors often obtain equity in the company and, therefore, a voice in company decisions.

Key Differences

A private equity firm's strategy is to buy mostly buy mature companies that are already established. The companies m▨ay be deteriorating or failing to make the profits they should due to inefficiency. Private equity firms buy these companies and streamline operations to increase revenues. Venture capital firms, on the other hand, mostly invest in startups with high growth potential.

Private equity firms mostly buy 100% ownership of the companies in which they invest. As a result, the firm is in total control of the companies after the buyout. Venture capital firms invest in 50% or less of the equity of the companies. Most venture capital firms prefer to spread out their risk and invest in many different companies. If one startup fails, ꦺthe entire fund in the venture capital firm is not affected substantially.

Private equity firms usually invest $100 million and up in a single company. These firms prefer to concentrate all their efforts on a single company since they invest in already established and mature companies. The chances of absolute losses from such an investment are minimal. 澳洲幸运5官方开奖结果体彩网:Venture capitalists typically spend $10 million or less on each company since they mostly deal with star﷽tups with unpredictable chances of failure or success.

Special Considerations

Private equity firms can buy companies from any industry while venture capital firms tend to focus on startups in technology, biotechnology, and clean technology—although not necessarily. Private equity firms also use both cash and debt in their investment, whereas𒊎 venture capital firms deal with equity only. These observations are common cases. However, there 🍰are exceptions to every rule; a firm may act out of the norm compared to its competitors.

Correction—Dec. 2, 2022: A previous version of this article wrongly stated that venture capital firms are limited to s﷽tartups in technology, biotechnology, 🦹and clean technology. In fact, VC firms can work with a broader range of companies and sectors.