Anyone who moves in investment circles will have heard about both private equity and venture capital and you can be forgiven in thinking that these two investment vehicles operate in the same way. Once you scratch beneath the surface however you can see clearly that whilst both have similarities, there is in fact a lot of difference in terms of approach and the strategy by which each vehicle operates. To help us understand the difference between private equity and venture capital, we have the financial guru that is Tyler Tysdal on our team to help us separate the two. Tyler has been on both sides as both a fund manager and an investor, making him the perfect person to help us out.
Types of Business
The key difference between these two strategies of investment comes down to the business which is being invested in. In the case of venture capital this is an investment fund which focuses on smaller business and new businesses, whereas in the case of private equity these are investments which are made into long standing businesses, usually private. There are some cases where a public company will be invested in with a view to turning it private but these are in the minority.
Stage of Investment
For venture capital the investment comes at a very early stage and usually takes place at the initial stage of a company’s operations. Though investing at this early stage the vehicle can impact opportunities and ensure that the business reaches its goals. In the case of private equity we see investment in companies which are already established, meaning that the investment will come at a much later time.
It is extremely rare that a venture capital investment will occupy more than 49% of the business which they have invested in whereas in the case of private equity investments these usually involve a full 100% takeover of the company which is being invested in.
When a private equity investment takes over a company they are looking towards both the growth and the expansion of the business in order to see heavier returns on that investment. When it comes to venture capital however the focus is very much on establishing the business and scaling up operations in order to launch the young enterprise.
There are of course different levels of risk with each type of investment which both the vehicle and the investor will have to take into consideration. The private equity route is of course far less risky given that the business and its existing reputation can be viewed and used to strategize. In the case of venture capital there is no telling just how successful this investment will be which is why it becomes high risk. Generally you’ll see those with both money and expertise investing into venture capital, because this way they can lend both experience and investment to the young business.