Private Equity vs. Venture Capital: What’s the Difference?
Every business will at some point need funding to thrive and grow. Funding needs can include a business loan for expansion, a loan for the purchase of equipment, a commercial mortgage loan, or operating capital. Funding choices may include private equity or venture capital, but the two are not the same.
What is Private Equity?
Private equity is where direct investment is made in a privately held company for ownership or interest, in that company. The investment can come from a private equity fund or high-net-worth individuals or firms.
Private equity investments are made in private companies to provide distressed funding, to buy out a company, or cash out the founders or other investors. Private equity investors generally focus on mature, stable companies; typically not small companies. The downside to private equity funding is that the business owners generally give up control.
What is Venture Capital?
Venture capital is where a fund or investors provide cash for a private business in exchange for a minority stake in the business. Venture capital investors can provide seed capital for businesses that are just getting started. They can offer early-stage capital for companies that have been operating for several years and are in a growth model. And they can offer late-stage capital for companies that are experiencing solid growth, and which are aiming for additional growth.
What Are the Key Differences Between Private Equity and Venture Capital?
Private equity firms mostly buy established and mature companies that may be failing or deteriorating. Venture capital firms generally invest in young companies with high growth potential.
Private equity firms generally buy 100 percent ownership in a company, thus taking total control after a buyout. Venture capital firms generally invest less than 50 percent in the equity of a company.
Private equity firms focus on large businesses while venture capital companies focus on smaller businesses.
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