To some, it can be easy to confuse venture capital and private equity funds, some even consider the terms to be interchangeable. However, when all things considered, both are worlds apart and have completely different definitions, uses, outcomes and target-companies.
This article will explain the fundamentals of each of these which are essential and integral in effectively understanding each and in turn, contrast some of the key differences and uses of both private equity and venture capital funds to provide information and guidance to those starting out with investments.
All about Private Equity and Venture Capital
Private equity funds are a form of investment where private equity investments are made in businesses not listed on the stock exchange. Typically, these funds come from a range of places with the largest proportion of this coming from pension’s funds, with the amount growing every year. Other sources of funds include private personal funds, corporate funds, sovereign wealth funds, insurance companies and banks.
Normally, when a private equity fund is used the investor will take a controlling role in the company that is receiving the funds in order to achieve the growth goals by implementing restructure and support the company’s management in achieving these strategic growth goals whilst still expressing a level of ownership.
Venture capital funds are commonly used when start-up companies, which are growing and have success, need a set amount of investment in order to begin to operate and reach this projection and therefore need ways to invest in their business. During this process, wealthy investors will typically invest in people, rather than a company as often the company has yet to be launched. The capital invested in these businesses with a projected profitability is known still subject to a high amount of risk and various unknowns, where the name venture capital comes from.
Venture capital and private equity funds are two independent types of funding with different uses, outcomes and users.
In private equity funds, the investor will typically purchase the entire company, and implement restructuring and change the company in ways they see fit to meet their growth aims whereas in a venture capital fund the company will typically be managed by those who it was managed by before.
To summarize some of the main fundamentals of each:
- Venture capital: Starts with people and being pitched to wealthy investors to assist in funding the start up. Starts with people and then works to see what numbers of profit can be obtained.
- Private equity: Typically starts with an established company and will start with a financial target and goal meaning restructuring to maximize profit and try to make money. This is often used to turn filing companies in to profitable goldmines.