Private Equity firms are in the business of investing in companies. However, while that seems like the same thing venture capital firms are about, the differences are wider than you think. Private Equity firms, usually have private equity funds or simply use investor capital to buy into companies and expand their value. They provide the finances required to invest a company in terms of corporate restructuring, leveraged buyout, and so on. While some private equity firms provide venture capital on certain occasions, their focus is on higher valued investments with fewer risks. Funding start-ups are riskier for a myriad of reasons, but that is what Venture Capital is about. Investors provide start-up funds for these companies that seemingly have long-term growth potential. Here are some of the clear differences between private equity firms and venture capital firms.
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The ownership structure of both companies are different in that private equity firms do not mind owning 100% of the companies they’re investing in. Hence, they typically go after controlling shares. Venture capital firms, on the other hand, can own as little as 10%. They do not go beyond obtaining minority stakes.
Size of the companies being invested in
Private equity firms invest in companies that are already big. They go after companies that are big, who need help with restructuring, expansion, and so on. Venture capitalists are in the business of investing in companies from scratch. Hence, they go after smaller firms.
From the size of the company, we can easily tell the risk associated with the companies. Private equity firms invest in companies with a track record of success who just need investment to create an increase in value. Venture capital firms, on the other hand, take on the risk of the business failing amongst other things, as they invest in start-ups.
The environment of a typical business that is invested in by a private equity firm is controlled. It has a steady structure, a proper system, and just about everything is in place. It has clear-headed employees and management with a vision of the business, so it is much safer. However, venture capital firms invest in environments that thrive under chaos. The vision might still be blurry, and the people can generally be irrational.
Venture capital firms usually obtain equity in companies they invest in. They offer start-up capital and are offered a percentage of interest in these companies. However, private equity firms can offer a hybrid of debt and equity to companies they invest in.
The end goal of both companies is to be able to exit their investment companies and make profits off them. However, the time span of their exit strategies is slightly different. Private equity firms tend to stay a little longer – like 6 – 10 years. Venture capitalists, however, are out in about 4 – 6 years. Still, their goals are the same.