What Is The Difference Between Venture Capital and Private Equity?
If you’re studying in the field of business, you may have already heard of the terms ‘Venture Capital’ and ‘Private Equity.’ Both are types of financial investment with goals of significant growth. The concept is mainly to acquire a business, improve it by fueling it’s growth and reducing it’s expenses and then existing (selling) the business to a larger buyer, fund or the capital markets through an Initial Public Offering (IPO). Exiting the business is the most common way for Private Equity and Venture Capital to make large sums of money on their investments.
Now, there is a difference between the two approaches and how they work. It is essential to understand the distinction between the two if your goal is to enter the space. So let’s look at the difference:
What is Private Equity?
Private Equity refers a large PE company or fund that takes majority ownership (equity) and/or control of a business so they make changes to profit from it. Acquisition can be private firms or the purchase of large portions of shares of public firms that they then delist from the market. Private equity is really only open to high net worth individuals, companies or other funds who wish to invest in the acquisition to make a better return than the market generally offers.
The leveraged buyout is commonly used in dealing with Private Equity. This means that in addition to an investment amount by the private equity firm, the business being acquired itself will take on debt and equity obligations to help pay for the acquisition. Once majority ownership is acquired a PE firm begins to work on improving the business and preparing it for a sale.
What is Venture Capital?
Venture Capital on the other hand is money provided by to startups or younger businesses that have a large potential for growth. This influx of capital is added to help the growth of the business and enter new markets. Most investments in VC are wealthy individuals or companies that provide money, consulting, access to a network and many other resources to help the company and the Entrepreneur reach its next level.
Venture Capitalists are looking to get in early into these high potential businesses and capture the appreciation from the business growth so when they sell their equity at a later date, it is at a higher value, multiple and valuation. Typically the financial investment required is no less than two years.
Key Differences Between Venture Capital and Private Equity
A business-minded person needs to know the distinction between venture capital and private equity. This will help them invest their money properly or receive the correct investment for their business. The following are the key differences between Venture Capital and Private Equity.
- Private equity focuses on developed and established companies in the industry. Venture Capital is focused on new businesses that have a lot of potentials to grow and succeed.
- Investors use Private Equity if they want to have full ownership of the company. These investors wish to pour their money on well-established companies because it won’t incur losses despite its maturity. Investors use Venture Capital if they only wish to buy 50% or less of the company’s equity. Since they only invest little money, they can help other firms as well so it’s less risky.
- Private Equity is less risky than Venture Capital because well-established businesses have fewer chances to fail.
- Private Equity is focused on getting control of corporate governance. Venture Capital is focused on improving the management capability of the firm.
Top Platforms for Venture Capital and Private Equity
Aside from knowing their differences, it’s also significant to know the top platforms that are dedicated to investing. The following are the top 5 investing platforms for Venture Capital.
Angel Kings – Invest in Startups
They create equity crowdfunding and fundraisings to support small businesses.
They provide opportunities to new investors to invest starting at $100 to help startup companies.
They involve investors in discussing deals and helping them track their investments. Gust also provides different platforms where their customers can invest their money.
OneVest is a crowdfunding platform that has investment advisers to help those who wish to make use of their money.
OurCrowd is based on Israel that strives to help startup businesses. They require startup businesses that they help to share a portion of their revenue to charity.
On the other hand, here are the following investing platforms for Private Equity.
The Blackstone Group
They are an American Private Equity firm and is known to be the top investment platform in the world.
The Carlyle Group
The Carlyle Group is one of the biggest American Private Equity firms with around $195 billion worth of assets.
KKR is an American investment company that offers opportunities such as real estate, private equity, credit, etc.
TPG is a global investment firm that owns around $83 billion worth of assets with 14 officers around the world.
Warburg Pincus is a global private equity firm that’s known to invest in world-class businesses.
Opportunities to Learn More About Investment
Learning about investments is an interesting way of managing your assets. Here are the top 5 schools that offer the best MBA programs for investment banking jobs.
- NYU Stern School of Business, New York University
- The Wharton School of the University of Pennsylvania
- Harvard Business School
- London Business School
- Stanford Graduate School of Business, Stanford University
If you are more into reading and self-study, here are some investment books that you might want to read.
- Liar’s Poker by Michael Lewis
- Monkey Business: Swinging Through the Wall Street Jungle by John Rolfe and Peter Troob
- Investment Banking: Valuation, Leveraged Buyouts, and Mergers & Acquisitions by Joshua Rosenbaum and Joshua Pearl
- The Intelligent Investor by Benjamin Graham
Remember that by investing your money, you have the power to make a business grow and become an industry leader.