Wondering to know the result of the battle between Venture capitalist vs Private equity, this post will give clarity to all your doubtful thoughts in mind.
During the initial days of a startup, founders had to invest their own savings into the business. But later when a business shows massive growth and owners want to expand their business then they need funding.
But many people are confused that which type of investor will be best for their business in the long-term.
So, in this article, we will discuss the difference between a venture capitalist and private equity(Venture capitalist vs Private equity) and a detailed concept about them.
During the initial days of a startup, founders had to invest their own savings into the business. But later when a business shows massive growth and owners want to expand their business then they need funding.
But many people are confused that which type of investor will be best for their business in the long-term.
So, in this article, we will discuss the difference between a venture capitalist and private equity(Venture capitalist vs Private equity) and a detailed concept about them.
Tabular representation of Venture capitalist vs Private equity
Basis
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Venture Capitalist
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Private Equity
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Meaning
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Venture capitalists are the persons or firms that invest in small startups and small businesses. They do not invest their own money
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Private equity is the investors who invest in stable companies that have not been listed as a public exchange.
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Risk
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Venture capitalists take more risk.
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Private equity investors take less risk.
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Type of companies
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Usually, they invest in innovative startups like Softwares, technology, biotech, etc.
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They can invest in any industry like manufacturing, retail, IT, FMCG, etc.
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Amount of investment
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They invest $10 million or less.
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They can invest up to $100 million
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Number of investments
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They invest in many companies at a single time.
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They only invest in fewer or single companies at one time.
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Ownership
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They cannot purchase more than 49 percent of equity shares of a company
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They can purchase up to 100 percent of the equity shares of a company.
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Stage of funding
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They usually invest in the initial days of a startup.
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They usually invest in the later stage when a company wants to expand.
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Criteria before investing
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Before investing, venture capitalists are more concerned about the management team.
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Before investing, private equity investors are more concerned about the previous financial reports of the organization.
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Fund requirement
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Companies approach venture capitalist to scale its operation
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Companies approach private equity investors when they want to expand their business.
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Motive
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A venture capitalist motive is to increase the valuation of the company.
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A private equity investor's motive is to bring positive net profit in the organization.
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Venture Capitalist vs Private Equity: The Major Differences
Now we will discuss the difference between the two types of investors more deeply-:
1. Venture capitalist vs private equity: Meaning
Venture capitalists: Venture capitalists(VC) are the persons or firms who invest in high growth startups and small companies in exchange for equity shares of that company. They bring seed capital for your business.
They do not invest their own money but utilizes the money of corporations, investment companies, and limited partners.
Private Equity: On the other hand, Private equity investors are the persons who invest in stable companies in exchange for the stake of that company. They bring growth capital for your business.
They only invest in private limited companies. It means that they invest in companies that are not listed for public exchange.
2. Venture capitalist vs private equity: Risk
One of the major differences between venture capital(VC) and private equity is that venture capitalists take more risk as they invest in high growth companies at a very young stage.
At that time the founders and management team has less experience and training.
Private equity on the other side invests in the later stage when they feel that the company has become stable and mature.
3. Venture capitalist vs private equity: Type of companies
As venture capitalist(VC) only invests in high growth companies so they prefer Softwares, technology, Biotech startups.
On the other hand, private equity investors can invest in an industry that can be manufacturing, retail, IT, FMCG companies, etc. They prefer these types of businesses because they are stable companies which can yield profits.
4. Venture capitalist vs private equity: Amount of investment
A venture capitalist invests less amount as compared to private equity investors. A venture capitalist can only invest $10 million or less in a single startup.
But on the second side, private equity investors can invest up to $100 million in a single corporation.
5. Venture capitalist vs private equity: Number of investments
A venture capitalist invests in a large number of small companies or startups in a single time.
This is because he knows that he is investing in high growth and high-risk companies so if he invests in 100 startups and out of that 90 startups fail then also he will earn huge profit as the rate of profit of 10 startups will be more than the rate of loss of 90 startups.
On the other hand, private equity only concentrates on fewer companies or single companies. That's why they put a lot of money into a single company only.
6. Venture capitalist vs private equity: Ownership
Usually, the venture capitalists can purchase 50% or fewer equity shares of the company in which they are investing their money.
On the other hand, private equity investors mostly purchase up to 100 % shares of the company in which they are investing. It means they can have full control over the decision-making process of the company.
7. Venture capitalist vs private equity: Funds requirement
Most companies approach to venture capital firms when they want to scale their operations. This is mainly done by small startups and companies.
On the other side companies require funds from private equity investors when they want to grow and expand their business. This is the later stage in which the company wants to earn more revenue to show a profit in its balanced sheet.
8. Venture capitalist vs private equity: Stage of funding
A venture capitalist invests in the initial days of startups and on the other side private equity invests in later-stage or expansion stage of a startup.
9. Venture capitalist vs private equity: Criteria before investing
Before investing, venture capitalists are more focused on the quality of the management team in the business. They want an experienced and professional management team.
On the other hand, private equity investors are more focused on profit and loss, sales, revenue data for the last 5 years.
10. Venture capitalist vs private equity: Motive
The motive of a venture capitalist(VC) is to help in increasing the valuation of the company so that price of his shares increases and he can exit the company by selling his stake.
On the other side, the motive of private equity investors is to increase the revenue and profit of the business. His focus is on the net profit of the company.
Advantages of venture capitalists
Advantages of venture capitalists features-:
- They invest large funds
- They have business expertise and experience.
- It's not mandatory to payback.
1. They invest large funds
As venture capitalists invest money in the initial days of a startup, so it gives a great boost to the growth of the company. Founders utilize these funds to expand their operations.
2. They have business expertise and experience
As in starting days, the owners of the business do not have proper knowledge and experience, so this restricts them in taking proper business decisions.
Venture capitalists have persons with great business experience and sometimes they direct founders in the right direction.
3. It's not mandatory to payback
When your business borrows money from a bank then it becomes a mandatory obligation to pay the money back even if you suffer losses.
But in case of venture capitalist(VC), if your startup suffers a loss then you can postpone the payment of venture capitalist and even its not necessary to pay them.
But to improve your credit rating and attract future investments, you should pay them.
Disadvantages of venture capitalist
Disadvantages of venture capitalist features-:
- Loss of control
- Loss of ownership
1 Loss of control
As venture capitalist posses some shares of the company in exchange for their money, so sometimes they influence decisions of founders. Sometimes they take decisions in favor of them.
2. Loss of ownership
In some cases, because of the shortage of funds founders of the business are ready to give the majority stake of the company. This leads to a transfer of ownership from founder to VC.
Not always but sometimes they misuse their power in favor of them to earn more profits.
Advantages of private equity
Advantages of private equity features-:
- Cash inflow
- They bring professional expertise
- Commitment
- Relationship
1. Cash inflow
Private equity investors bring cash in business when needed. They invest a very large amount of funds as compared to any other investors.
The founders would have sufficient money to expand the activities of the business.
2. They bring professional expertise
As private equity investors have experience of many years, so they can help the company in the growing right direction.
Their main motive is to bring net profit and with their talented manpower, they are willing to do this also.
3. Commitment
Private equity investors are very much committed to their goals. Their motive is to earn profit like any other investor but on the second side, they also help founders and companies to grow.
They give advice to the management team, assist them in taking the right decision, help them in proper utilization of resources, etc. They are very much dedicated to bringing the profit in the balance sheet of the company.
4. Relationship
Private equity investors have good and strong relationships with other professionals, managers, and businesses. This can also help owners of the company as they can use their resources, ask them for advice, maintain good long term relationship with them, etc.
Disadvantages of private equity
Disadvantages of private equity features-:
- Loss of ownership.
- Not everyone can approach private equity.
- Loss of control.
1. Loss of ownership
As private equity investors contribute a very large amount of funds so in exchange they also demand a large number of shares. Sometimes they acquire the majority stake in the company and founders lose control of their business.
2. Not everyone can approach private equity
Usually, private equity investors do not invest in every type of business. They invest in selective companies only that fulfill their criteria of selection.
If your business profit and loss statement, sales report, revenue report, a balance sheet, and other reports of the previous year are not good then there is very little chance that you will get funding from these investors.
You should have a stable and mature startup to attract these investors.
3. Loss of control
Private equity investors do want to influence the management of the company as they have contributed a very large amount of funds.
Most of the time they help in taking the right decisions only but exceptions are always there who take the decision for their selfish motive.
Question and answers of venture capitalist vs private equity
Now we will discuss some most asked question and answers to clear your confusion about this topic-:
1. Do venture capitalists get equity?
Yes, venture capitalist(VC) gets equity in exchange for his investment in small startups and small companies. They invest their money in the hope that in future the price of their stake will increase.
2. What is private equity round?
A private equity round is organized by private equity firms so that companies can pitch them and can raise investments from them. The risk in this type of investment is less.
3. Is venture capital a form of private equity?
Both investors provide funds to companies in exchange for equity shares. So, in short, we can say that yes, venture capital is a form of private equity but in reality, we distinguish them because they both have different roles and responsibilities in the organization.
4. Where do VC firms get their money?
As we all know that venture capitalist(VC) do not invest their own money. They use the money of big corporations, pension funds, insurance companies, charity, investment companies, etc.
My views
So, the main question comes that which investor you should approach for funding. The answer is that it totally depends on your business. If your business is small and is not earning profits then you should go for a venture capitalist.
But if your startup is stable and your past financial record is good then go for private equity investors.
But there is another side also that if your business cash flow position is good and you are earning good profits then why to go for investor and dilute your stake. In that case, the bank is a better option.
Conclusion
So, this was all about venture capitalist vs private equity. In this article, we have discussed the basic concepts, the difference between the venture capitalist and private equity, and the advantages and disadvantages of both investors.
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