There is a lot of confusion when it comes to the difference between private equity and venture capital. Both are not the same. Private equity investments are generally made at the later stage, or the expansion stage of the business. In contrast, venture capital agreements are entered at the initial stage or the beginning of the business. There is another big difference between the two- private equity investments are made in larger companies that have been around for a long time- in short, they are mature companies. Venture Capital investments, on the other hand, are made in smaller sized companies that are passing through the early stages of their investment.
Tyler Tysdal – An insight into the major differences between private equity and venture capital
Tyler Tysdal is the Managing Director of TitleCard Capital and an experienced investor and entrepreneur. He has also completed his MBA from Harvard Business School. He says that you should always consult a good fund manager to understand the key differences between private equity and venture capital before making any kind of investment if you are interested in them for the expansion of a business. With this knowledge, you will be able to identify the impact opportunities for both. Some of the common examples of private equity are leading companies like Apollo, Blackstone, Bain Capital, and more. He lists the following points that make private equity different from venture capital-
- Investments that are made in a private company by its investors are known as private equity. Venture Capital means the contribution of capital that is made by an investor with a high return and risk potential.
- Firms that specialize in private equity make their investments in just a few companies; however, firms that specialize in venture capital make investments in several companies.
- The fund that private equity firms offer is for mature companies that have good track records. On the contrary, venture capital funds are given to a small business that often does not have proven track records.
- Firms that specialize in private equity investments generally give capital to any industry; however, venture capital firms focus on industries that have high growth potential; for instance, they like to focus on industries that specialize in energy conservation, information technology, etc.
- The risk potential is higher in venture capital over private equity.
- In cases of private equity investment, the funds are focused on restructuring the company. In the case of venture capital, the funds are provided for streamlining the operations of the business. Here, the goal is to develop and launch new products or services in the market.
- Private equity firms have 100% ownership rights, whereas venture capital firms generally have a share that does not exceed 49%.
Tyler Tysdal says that investors should know the difference between private equity and venture capital before making any investments in a business. It is prudent to discuss the pros and cons of both of them with a skilled and experienced individual before making a choice always!