Differences between Private Equity and Venture Capital
To say that the financial landscape is complex is an understatement. One complicated part of the finance industry is private markets. Private markets have considerable control over the United States economy, both in the amount of capital and the number of companies they control. That is why anyone working in business should understand how private markets work.
Private equity (PE) and venture capital (VC) are subgroups of the private market. Both raise capital from limited partners- outside investors such as insurance firms or wealthy individuals. Both firms invest the raised funds in private companies in exchange for equity and sell their shares for higher prices in the future. Both firms charge their partners management fees and take on a minimum return rate of around 20%.
Outside of those similarities, everything else is different when it comes to private equity and venture capital, primarily how they conduct business.
What is Private Equity?
Private equity is the shares representing ownership of a company that is not publicly traded. The source of funds is mostly individuals and firms. Because the intent is to invest in a company directly, a significant amount is needed, so only entities with deep pockets are involved in private equity deals.
What is a Venture Capital Fund?
A venture capital fund is a merged investment fund from private individuals or accredited investors. However, the goal is not to invest in any company. Venture capitalists typically target small to medium-sized startups. Since venture capitalists target new companies that do not have an extensive portfolio, these are generally considered high-risk/high-reward investments.
5 Main Differences between PE and VC
- Target Companies
Venture capital often focuses on startups in the tech and life sciences space. Private equity firms use their funds to invest in much larger companies across a broader spectrum of enterprises. They also tend to avoid acquiring commercial banks because of heavy regulations.
- Required Capital and Allotment
Generally, both PE and VC require capital that is out of reach for most people. However, PE allocates its funds more on business expansion and growth while VC allots money to jumpstart operations.
- Recruitments
Private equity firms often hire people based on their experience with closing deals and their financial knowledge. That is why candidates who are considered for PE firms have a degree in areas like statistics, economics, accounting, or finance. Since their hires may get involved in closing private equity deals, PE firms always go for experience and rarely hire people straight out of college.
On the other hand, since most VC investments are for startups, financial acumen is not necessarily a requirement for a career in venture capitalism. VC firms often hire people based on product knowledge, management skills, or marketing abilities.
- How they make money
Private equity investors earn most of their money by selling equity shares at a higher price than what they paid for. Of course, this takes a lot of time. On the other hand, since VC is more involved in startups, the goal is to make the company as big as possible so that the valuation increases.
- Acquired percentages
More often than not, PE buys the whole company or a majority stake. On the other hand, VC settles for a majority stake while providing startups needed guidance and initial capital.
Conclusion
Private equity and venture capital are two sides of the same coin. They have similarities, but they differ in the companies they choose to invest in, the percentage of acquisition, their capital allotment, recruitment of employees, and how they make money.
