Venture Capital vs. Private Equity: What’s The Difference

When looking for outside financial backing for your business, venture capital and private equity would be your two choices that seem similar yet have significant differences. Their similar concept, which may make you consider them as one, refers to a firm that invests in private companies in exchange for ownership. Both are financial backings a company uses but at different stages.

Private equity is a huge investment you make in a stable company purposefully for investment. On the other hand, when you fund new ventures that need money to execute their ideas, that investment is called venture capital. You take the risk with the hope of better returns in the future.

Find out different ways firms involved in venture capital and private entities conduct business, from the company size they invest to the amount of investment they make and the percentage of equity they claim.  

Astrella can help you know the difference between venture capital and private entity.

What is Private Equity?

Private equity is investments made to private companies not part of the public stock exchange by big investors. They claim equity or gain ownership of private companies or privatize public entities and remove them from the list of the public stock exchange.

These firms acquire a company already existing, intending to encourage its growth. Their primary strategies are; Mezzanine capital, venture capital, growth, and leveraged buyout.

What is Venture Capital?

Venture capital is a subset of private equity. The only difference is that private equity investors choose already stable firms. At the same time, venture capitalists invest at the starting stage of a firm they think has high growth potential.

Venture capitalists pool resources to form a partnership and collectively identify promising ventures. Then, they collectively buy equity from the business and use partnership money to foster growth.

Private Equity vs. Venture Capital Investors

Although there are quite a few differences between these investors, the following are some of the most significant:

  • Private equity investors go for already stable businesses. They will then make significant improvements and sell it at a profit. In contrast, venture capital investors go for new and small companies with promising growth capacity and take high risks as they gamble for higher returns.
  • Private equity investors plan to improve the business before selling it at a profit. In contrast, venture capital investors have a long-term interest in the company to enjoy returns.
  • Private equity investors usually acquire the whole company or the biggest share to attain autonomy. On the other hand, venture capital investors split shares amongst other venture capitalists, the owner, and angel investors.

The Bottom Line

Understanding the core differences between private equity and venture capital investors is essential to help you choose the best route for your business. For example, you may decide to risk your investment with venture capital and get higher returns later or reduce risk with private equity. Your decision will depend on the size of the company you invest in, the percentage of shares claimed, and your exit strategy.

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