It’s true that both venture capital and private equity firms supply businesses with the capital they need but there are many differences between the two. Learning the difference between them will give you an edge when it comes to doing business.
Everyone who works within the finance industry will often see the terms Venture Capital (VC) and Private Equity (PE) thrown around often, and sometimes used interchangeably. Both of these terms do describe a type of investment where cash is being used to acquire equity within a business and hopefully get a return on their investment. But in reality there are many important differences that you need to consider. Once you find out the truth about these two terms you’ll quickly understand the difference.
The Definitions Of VC and PE
Private equity refers to a class of assets that consist of equity securities in companies which aren’t publicly traded on any stock exchange. A few examples of some investment strategies used in private equity are Growth Capital, Leveraged Buyouts, and Mezzanine Capital.
Venture capital is money that gets used by start ups, and other businesses in their early stages which have a high potential. Most of the time you’ll see Venture capital funds investing in companies that are developing novel technologies or other high tech businesses like biotech and IT. A high risk investment is right up a Venture capitalists alley.
A big difference between the two is the risk factor. VCs understand that the companies they fund are high risk investments. That’s why they go to great lengths to diversify the types of investments they make. That way even if several of their investments fail they will still have a good chance to have some of them make enough returns to keep their firm profitable. Because they make small investments in tens of different firms this model is often profitable for them. When it comes to PEs, they will make much larger investments in a smaller amount of firms. They will keep their investments to relatively safe businesses. They keep their money safe by putting it into larger companies that have a history of being stable.
Both venture capitalists and private equity firms play an important role in keeping business going. They help growing businesses with the money they need to keep expanding without having to take out expensive loans from a bank. They also help new companies get the money they need in the early stages of the business when money is tight.
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In this Tulane University video, Lawrence Schloss, co-founder and CEO of Diamond Castle Holdings,LLC., discusses the rapid expansion of the private equity market. What is fueling this extreme increase? What can we expect in the future with this type of investing? Find out what exactly private equity is, why current market and regulatory factors fuel private equity investing and what the investment cycle entails.