Funding 101: Private Equity vs Venture Capital
Private equity and venture capital are often viewed as the same type of funding. They both involve outside firms that invest in companies for profit. But there are some major differences between private equity vs venture capital.
Private equity forms typically focus their efforts on companies that have been in business for a significant length of time. Keep in mind, however, that this doesn’t necessarily mean the companies are profitable. Some private equity firms buy stake in companies that are not making a profit, with hopes of turning them around.
Another distinguishable characteristic of private equity firms is the amount of stake they purchase. Most of these firms buy complete (100%) ownership of the company . This, of course, gives them full control over the company after the buyout is complete.
There are always exceptions to this rule, but the fact is that most private equity firms seek to buy companies outright, securing 100% ownership.
Private Equity vs Venture Capital
In contrast, venture capital firms typically buy startups that have been in business for a very short period of time. The entrepreneur will pitch his or her idea to a venture capital firm in hopes of acquiring funding in exchange for stake in their business. If the firm believes the business idea is sound and has a high chance of success, they may offer to buy stake.
Unlike private equity firms, venture capital firms typically only buy a percentage of the business. A venture capital firm, for instance, may buy 20 or 30% of a startup business. This mitigates the firm’s risk while still giving them enough stake to turn a profit if it the business succeeds. But at the same time, the lack of full ownership means the private equity firm has limited say in the business’s day-to-day operations.
For most entrepreneurs, venture capital is the better option since it’s more flexible and easier to obtain. As you can see from this blog post, though, there are both pros and cons associate with venture capital and private equity. Take the time to research both funding options to determine which one is best suited for your business.
Hopefully, this will give you a better understanding of the differences between private equity and venture capital.