Private Equity Vs. Venture Capital

Last Updated: June 21, 2024

Private Equity Vs. Venture Capital

Putting up a business is a challenge. How much more running it? No matter what type of company you have — startup or established, it all goes down to your capability keeping it healthy, growing, and profitable. Thus, if you want it to prosper and not to crumble, you may want to dig into this article. We have provided comprehensible information on different types of capital funding which can help you manage your business and as well as expanding it.

Private Equity Vs. Venture Capital

Most of the time, private equity is mistaken as venture capital since both are all about investments and firms. However, they have a wide array of differences when it comes to the amount of money invested, sizes and varieties of companies bought, and distinct equity percentages in the businesses that they have invested.

Private Equity Vs Venture Capital

The Main Differences between Private Equity and Venture Capital

  • Private equity firms purchase and, somehow, save grown and established companies. These establishments are either crumbling or failing to produce profit because of incapabilities. Venture capital firms, on the other hand, commonly make investments on small business and startup companies with a huge possibility for growth.
  • 50% or less equity of a company is the only investment venture capital firms can make while private equity firms purchase 100% ownership in the business that they invest in. Thus, the business establishment that private equity firms spent their money on has absolute control of the said firm following the buyout.
  • Private equity firms invest in a single business establishment with $100,000,000 and more. However, venture capital firms only invest less to $10,000,000 in every business, for they commonly deal with small and startup companies with uncertain possibilities of success or failure.

For further understanding, let us dig deeper into private equity and venture capital’s overviews and processes.

Getting to Know Private Equity

Private equity, in the broadest sense, comes from investors — accredited or institutional — who can allocate a large amount of money on a long-term basis. It is a type of alternative investment which is made up of a capital that is not considered as a public exchange. Hence, it is consists of individuals that promptly invest their money in private businesses — or that participate in acquisitions of companies that are public— in which, as a result, deregistering of the public equity.

Thus, private equity is another form of private financing. Commonly, the firms and investors are of high net worth and enormous fortune. It is because the real aim is to make a direct investment in a particular business institution; hence, a large amount of capital is needed.

Know Private Equity

How Private Equity Works

Private equity firms raise funds from different kinds of investors mentioned above. Thus, the main source of income for this type of firm are management fees. The cost structure for these firms usually differs, but they generally include both performance and management fees. For instance, a particular firm charges a 2% management fee on an annual basis for a managed asset while also asking for 20% of the income accumulated from the sales of a specific company. Moreover, after gaining a good amount of money, a fund will close down to new investors. Every fund is settled with a deadline that is no longer than ten years.

The Types of Private Equity Funding

  • Funds of Funds (FOF) – This typically centers on investing in other funds such as mutual funds, hedge funds, etc. The goal here is to attain a wide diversification and less to no risk. Furthermore, the fund of funds commonly entices small investors who long for greater exposure with minimal risks.
  • Leveraged Buyouts – It is the acquirement of another business establishment with the use of a considerable amount of borrowed money to reach the acquisition cost. The assets of the acquired company are frequently utilized as collateral for debts — like loans, together with the assets of the acquiring business.
  • Real Estate Private Equity – This kind of funding demands a more massive minimum capital for investment in contrast to the other private equity funding types. Moreover, the funds of the investors are being cooped up for many years at a time.
  • Venture Capital – It is a type of private equity where investors give funds to entrepreneurs. Venture capital can appear in different forms depending on the time when it is given.
  • Vulture Financing – The target here are those companies that are in distressed; hence, it is also known as distress funding. The main goal here is to turn the tables by creating essential management changes, operation shifts, or selling assets in exchange for profits.

Known of Venture Capital

What is a Venture Capital

Venture capital is a category of private equity. It is a kind of financing that is offered by firms or well-off individuals to small or start-up businesses that have a high potential for long-term growth. The money is generated from big-time investors, banks for investments, and more. Furthermore, VC can come up in different forms such as managerial proficiency, technical competency, or monetary form.

When a venture capitalist or an investor tends to buy a share in a particular business, which eventually making this individual a business partner — that is when the VC investment is created. Moreover, this investment is also called risk capital or patient risk capital. It is because it comes along with the biggest nightmare of every business owner and investors: loss of money.

Venture Capital

The Venture Capital Process

In searching for venture capital, the first thing that you should do is to hand over your company’s business plan. You can submit it to an angel investor or a VC firm. Due diligence must be performed by the interested investor afterward. The investor will have a thorough investigation of your business’ products, operations, management, business models, services, etc. If the due diligence is done, the angel investor or the firm will promise a capital investment in return for equity. The funds are either given in one blow or rounds. However, in most cases, VCs are provided in rounds.

The investor will eventually have an active — and crucial — role in the sponsored company by giving pieces of advice and checking the company development before handing over the additional money. Moreover, in about 4 to 6 years since the initial investment, the angel investor, or the investor firm departs from the company. It is done by establishing an acquisition, initial public offering, or merger.

The Forms of Venture Capital

  • Seed Financing – It is where investors engage their capital in return for a company’s equity interest. It is utilized to support the first operation of a specific business establishment. Moreover, it is considered the riskiest and most complicated kind of investment.
  •  Start-up Financing – It is provided to companies to complete the development of products, services, or both. Thus, it ranges from product development to marketing.
  • Expansion Financing – It refers to the capital harnessed to expand the size of a company in different ways possible. Moreover, it can be used for both types of growth: internal and external. For the former, it is through an organic method like bringing out new products or services or attaining new clients. For the latter, on the other hand, it is by the implementation of acquisition and mergers.

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