Private equity and venture capital are very similar investment strategies which are often considered, wrongly considered, as being one in the same. When we dig down into the specifics of each investment vehicle however, a large amount of differences become apparent which is why they should always be considered as completely separate investment approaches.
To help us clear up the details we have financial expert Tyler Tysdal on board, who knows both of these investment strategies extremely well and has been both a fund manager and investor throughout his years in finance. Let’s take a look then at the key differences which you need to know, between ‘private equity and venture capital.
The basic difference between these 2 investment vehicles is that venture capital is is a term which we use in reference to the financing of start-ups and small businesses, made by investors who are looking for significant growth potential. Private equity on the other hand are investments which are made into private companies or public companies who the investors hope will be able to become private companies.
Stage of Investment
By nature of the two investment approaches the stages at which the investment will be made are very different. In the case of venture capital we see the investment at the initial stage of inception, in contrast a private equity investment will be made at a later stage once the business is fully established.
Private equity investments can be made into any company across a wide range of industries. In the case of venture capital however, we find that this is almost always exclusively in companies operating in rapid growth industries and industries which require heavy investments such as energy, tech, finance and chemicals.
Another key difference between those two strategies is the level of risk involved in each one. In the case of private equity we can see that the risk is significantly lowered because we are able to see the track record and success of a certain company following years of activity. In the case of venture capital this is a much higher risk strategy because of the fact that these are young companies which are being invested in, and the chances of success are nowhere near as high as in the case of private equity.
Generally speaking we see that private equity investments are about a 100% takeover of the company, in the case of venture capital however this usually don’ts exceed 49%, ensuring that the business owner will still have the control over their young company.
Private equity investments are made with an eye on growing and expanding a certain business, in the case of venture capital this is an investment which focuses on scaling up operations and offering both money and expertise to help the business to grow and establish itself.
Very similar strategies but both are very different in terms of their goals and their execution.