You have probably heard of the terms ‘private equity’ and ‘venture capital’ from companies like Clean Venture Fund, or as you look for different financing methods for your future business. Sometimes, those two terms are used interchangeably, though they are NOT the same.
While these two refer to companies investing in companies in exchange for equity, they have different features that make one more suitable than the other, depending on your business and needs.
About Private Equity
Private equity refers to a group of investors who will make a direct investment in a business. They would focus on more mature companies that have gone past the growth stages, providing funds to businesses in distress.
Sometimes, they would also buy out businesses, improving the operations to sell for profit. The goal here is to make the company more valuable than it was before to create a return of investment.
The biggest advantage businesses would get out of private equity investors is that you have access to funds AND expertise. If your investors have experience in the industry, then they can help you learn how to make the business improve.
However, these investors will have a majority stake in your company, having a say on how it will run. They may get rid of executives and perform major changes to your business. Furthermore, they will have the power to sell your company if ever they believe it is the best decision.
About Venture Funds
Venture capital, or venture funds, is a type of private equity. What makes it different from private equity is that investors would invest in startup businesses.
Venture capitals are given to small or starting companies that have great growth potential. This is a riskier investment that isn’t easily obtained, though investors get involved as there is the potential of a high return on investment.
This type of funding is helpful for new companies that have just begun their growth stage. Similar to private equity investors, business owners can gain immense knowledge and professional advice to help grow. With investors’ expertise, business owners can minimize the risk and avoid the usual mistakes startups commit at the start.
However, you will have to dilute your equity, issuing shares to investors. If ever you have to raise more capital, you’ll need to further reduce your ownership and control of the business.
What’s the Difference?
Besides the type of business private equity and venture fund investors get into, another difference is the control over one’s business.
Private equity investors would need a majority stake, while venture fund investors would ask for a minority stake in the company.
Furthermore, they have different exit strategies, with private equity investors wanting to improve businesses to turn them around for a sale. Compared to venture fund investors, private equity investors aren’t interested in staying involved with businesses for long periods.
Wrapping It Up
People would often confuse private equity and venture capital, though the differences are vast. You will need to learn the differences so you know which one is best for your business and long-term goals.