Learning about all of the different business investment vehicles is not easy and there are many myths which exist around some of these strategies. IT is for this reason that we have brought in industry expert Tyler Tysdal who is a fund manager for a large scale investment vehicle. One of the most common myths which we are going to debunk today is that venture capital and private equity investments are the same thing. It is understandable to consider these as one in the same, at least under a general umbrella, as both seek to invest in businesses. With this being said there are some very real differences between these two investment vehicles and these are the key contrasts which you need to understand.
Type of Investment
The clearest difference between these two investment vehicles are the type of investment which are made, in terms of which businesses. In the case of venture capital these are exclusively investments which are made into startups and young businesses, where the investor looks to assist with both money and with expertise. The idea of venture capital investment is that with the investor’s experience, they can help to grow the company and impact opportunities which present themselves. In the case of private equity however these investments focus on companies which are already established and the vehicle seeks to take over the company, almost always private businesses,.
Levels of Risk
Because of the fact that private equity investments focus on established businesses there is far less risk than a venture capital investment. Naturally there is a high risk with venture capital because of the fact that the business is still young and generally unproven. A centre capital investment is the investment in an idea, rather than the success of the company.
Stage of Investment
Venture capital investments are made into young companies so this investment will come at the beginning of the business’ life. On the other hand we can see that with private equity investments, this happens much later in the life of the business.
Types of Industry
To minimize the investor’s level of risk and to maximize their potential profits, venture capital investors focus on businesses within rapid growing industries. It is for this reason that companies in sectors such as tech, chemicals, finance and energy are always more favored by venture capital investors. In contrast private equity investments are made into businesses from all industries and all sectors.
Ownership of the Business
Private equity investments generally look to take over the company and acquire a 100% stake for their investment. When it comes to venture capital investments however these are very rarely more than 49%, giving the business owner the majority stake in their own business. Very often venture capital investments will look for less than 49% given the additional levels of risk which they can expect.
These are the key differences between these two very similar investment models.