Learning about all of the different business investment vehicles is not easy. Many myths exist around some of these strategies. One of the most common myths we will debunk today is that venture capital and private equity investments are the same. It is understandable to consider these as the same, at least under a general umbrella. As both seek to invest in businesses. With this being said, there are some genuine differences between these two investment vehicles. Here are the key contrasts which you need to understand.
Please keep in mind this article is for information only, please seek advice from a professional investor like Lincoln Frost. This is largely due to the fact that professionals have access to information the average investor may not see.
Type of Investment
The clearest difference between these two investment vehicles is the type of investment made in terms of which businesses. In venture capital, these are exclusively investments made into startups and young businesses. Where the investor looks to assist with both money and expertise. The idea of venture capital investment is with the investor’s experience. They can help grow the company and impact opportunities. In private equity, however, these investments focus on companies that are already established. The vehicle seeks to take over the company, almost always private businesses.
Levels of Risk
Because 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 it is still young and generally unproven. A center capital investment is an 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 in the beginning. 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 risk level and maximize their potential profits, venture capital investors focus on businesses within rapidly growing industries. For this reason, 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 take over the company and acquire a large stake for their investment. However, when it comes to venture capital investments, these are very rarely more than 49%. This is due to the business owner the majority stake in their own business. The venture capital investments will often look for less than 49%, given the additional risk they can expect.
These are the key differences between these two very similar investment models.