Venture Capital vs Private Equity
The investment world presents several concepts that you have to grasp in explaining trends and phenomenon. When discussing types of investors, it is vital to mention that they exist variedly. Among these investors are venture capital and private equity, which present a range of differences and similarities. This analysis focuses on these variations and points of convergence that exist.
From an academic angle, one can view venture capital as a subset of private equity. However, for the sake of decision-making in business circles, it is important that we consider them as distinct asset entities with different characteristics. These attributes, which make venture capital and private equity distinctive, are target companies, tax benefits, investor expertise, risk-reward profiles, deal structures, and minimum capital contributions among others. In simple, private equity refers to that capital you invest in a private company. In this case, private companies denote those firms whose shares are not traded on the stock market for the public to buy and sell. In such companies, owners control the kind and number of people whom they approve to invest with them.
In essence, private equity investors eye well-established companies in the market, which could be underperforming or undervalued. They do this with the aim of improving their performance and selling them for capital gain. Alternatively, they may split them and sell a section of the assets for a profit. Conversely, venture capitalist target young companies with the potential to grow. The target companies are usually in their early stages and pre-revenue. Venture capitalists therefore focus on nurturing such companies and helping them grow faster than before and later selling them or issue an Initial Public Offer for the public to invest.
Another aspect that illustrates the differences between venture capital and private equity is their target industries. For private equity investors, they mostly target all industries, which have a well-established marketplace. In other words, the focus here is the maturity of the company and its clientele. Additionally, they consider how the products and services of this company in consideration are known within the market. On the other hand, venture capital targets high-growth industries, which have the potential of growing very fast in the near future. Possible options here include the biomedical industry, high-tech and alternative energy. In their nature, these categories of companies grow faster compared to others, especially if the right strategies are implemented.
The return on investment for the two categories of investors further depicts their differences. For private equity, the main determinant is the risk of individual companies. The target could be 20% annually, over a period of five years, 10%, or less than that. In contrast, venture capitalists focus on many failures, a few success instances and solid returns. Nonetheless, the expectations of the investor must put into consideration all the risks present. Importantly, private equity investors intend to invest heavily in the tune of more than $100 million for big companies and more than $10 million where they are dealing with smaller firms. On the other hand, venture capitalists invest to a maximum of $10 million.
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