Venture capital (VC) is money invested into start-ups or similarly young businesses with potential for long-term growth.
Private equity (PE) investment is any capital directed toward a private company or entity. In other words, one that is not publicly listed or tradeable.
Understanding venture capital
Venture capital is invested into promising businesses by investors or funds in exchange for a minority stake. It’s important to note that venture capitalists inject cash to jump-start the business and take a non-controlling interest in return for their investment.
One of the most prolific venture capitalists is Google. Under a division known simply as GV, the search giant invests in emerging companies with great ideas to help it expand.
According to its website, GV has now funded more than 500 portfolio companies with a core focus on life sciences, frontier technology, enterprise, and consumers.
Since venture capital is invested in early-stage companies or start-ups with the potential for future growth, the investment itself tends to be riskier.
In some cases, venture capitalists may also lend their skills, contacts, experience, or knowledge in exchange for an equity stake.
The three types of venture capital
- Seed capital – for very early-stage companies without a product or established structure. Funds cover product development, market research, or basic setup costs.
- Early-stage capital – for growth companies in operation for around two years. These companies are characterized by established management, structure, and increasing revenue. Funds in this case are used to improve productivity or boost sales.
- Late-stage capital – for companies undergoing rapid growth that want access to funds to accelerate further. Many of these tend to be market disruptors.
Understanding private equity
Private equity investors make a direct investment in a company that is typically at a more mature stage than those targeted by venture capitalists.
Private equity may be directed toward a company in financial stress, but it is also used to purchase a company, streamline operations, and then sell it for a profit.
Unlike venture capitalists, private equity tends to be invested in exchange for majority control over the business’s operations.
This means private equity investors have more say in how the business is run and have the power to remove executives or make other significant changes.
Differences between private equity and venture capital
In addition to the level of control and maturity stage of the company, there are a few more differences between private equity and venture capital:
- Private equity firms tend to invest in multiple industries and prefer established markets and businesses. Many venture capitalists, on the other hand, are only interested in tech companies that have the potential to be market disruptors.
- Private equity investors tend to ignore emerging markets and instead want more control over saturated markets. Venture capitalists are always looking for the next emerging market as part of their high-risk, high-reward strategy.
- Since private equity investments are made on proven businesses in saturated markets, the amounts invested tend to be more than those made by VCs in a start-up. Indeed, PE investments are normally north of $100 million while VC investments tend to be $10 million or less.
- Venture capital (VC) is money invested into start-ups or similarly young businesses with potential for long-term growth. Private equity (PE) describes any capital invested in a private company or entity. In other words, one that is not publicly listed or tradeable.
- Since venture capital is invested in early-stage companies or start-ups with the potential for future growth, the investment itself tends to be riskier. Private equity is invested into proven companies in proven industries with investors possessing a higher degree of operational control.
- Venture capital and private equity investments also differ according to the level of risk, market preference, investment amount, and maturity of the company in question.
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