In the world of investing, Private Equity and Venture Capital are similar in their use of pooled assets to fund companies that are not publicly traded on any market exchange. Furthermore, both investments offer accredited investors (or, in some cases, investors that are required to meet higher qualifications) the prospect of earning returns (or, of course, incurring losses) after the private companies they support are sold for profit or are made public through an initial public offering (IPO).
But Private Equity and Venture Capital differ in several key ways. Chief among them: Private Equity generally invests in well-established, mature companies, which are, in some cases, experiencing periods of distress. Meanwhile, Venture Capital generally finances start-ups and small-to-medium enterprises that show meaningful growth potential but have yet to establish long-term track records. And while Private Equity ritually focuses on traditional industries like manufacturing, infrastructure, energy, and real estate, Venture Capital typically invests in innovative sectors like biotech, software, and media. Finally, while Private Equity investors tend to claim a 100% equity stake in the companies they invest in—thus empowering fund managers to grab the reins and make broad operational decisions – Venture Capital firms more commonly own just a minority stake, limiting their ability to exert managerial control (though that can be mitigated by the fact that some Venture Capital firms may secure seats on a company’s board of directors through their investments).
Importantly, the differences outlined above are not hard and fast rules, and there can be a crossover in the types of investments made by Private Equity firms and those made by Venture Capital firms. The aforementioned explanation is meant only as a general description, in broad strokes, of how the two types of investing differ.
What is Private Equity?
What does Private Equity mean?
Private Equity is a type of financing where investors typically finance well-established private companies in exchange for a full or partial equity stake in the business, where investors share in the profits of the company’s success (or losses of the company’s failure). In some cases, Private Equity firms take a reverse approach, where they gain control of a publicly-traded company with the intent to de-list it from an exchange and to bring it into the private space.
How does Private Equity work?
The Private Equity investment process is a multi-stepped effort, with an overall lifecycle ordinarily spanning five to ten years. The typical phases are as follows:
- A Private Equity fund manager, which is often also the General Partner of the fund, raises capital from outside investors, known as Limited Partners (LPs), assuming the fund is structured as a limited partnership (other corporate structures may be used in certain situations). Because Private Equity funds generally require significant minimum investment amounts, this asset class historically attracts investors with substantial capital, including foundations, corporate pension funds, funds-of-funds, insurance companies, family offices, and high-net-worth individuals.
- Private Equity fund managers scour the business landscape to find companies, often those that may be struggling, to invest in. This entails rigorous due diligence in order to ascertain a company’s recovery prospects, growth potential, and long-term profitability outlook.
- Once investment capital is deployed to the recipient company, Private Equity firms frequently assume active management roles to help businesses streamline operations and tilt towards profitability. This may be achieved by expanding product lines, launching marketing campaigns, implementing staff changes--and even by acquiring other smaller companies or selling pieces of the existing company.
- In the exit phase, the Private Equity firm generally seeks to either unload the entire business, divest its equity stake by selling it to new owners or take the company public through an initial public offering (IPO).
What is Venture Capital?
What does Venture Capital mean?
Venture Capital is generally a type of financing where a fund manager allocates capital to start-ups or early-stage companies that show high-growth potential. In exchange for their contribution, Venture Capital investors tend to receive minority equity stakes in the business, and potentially board seats, with the prospect of earning profits when the entity is sold or goes public through an initial public offering (IPO). Venture Capital firms may also provide technical expertise or advice to the companies they fund.
Venture Capital is typically used to fund innovative tech companies that face high degrees of uncertainty and consequently risk higher-than-average failure rates. But those that succeed may generate outsized profits.
How does Venture Capital work?
Venture Capital is a type of investment where the principals of a fund—knowns as General Partners, raise money from passive investors known as Limited Partners, including foundations, corporate pension funds, funds-of-funds, insurance companies, family offices, and high-net-worth individuals.
Venture Capital fund managers generally deploy capital to start-up companies that show innovative business models and high-profit potential. Depending on each company's situation, the Venture Capital fund may opt to invest its capital at any time or times throughout the following developmental stages, and the funding at these various stages is frequently, though not always, used for certain types of development (as outlined below):
- Pre-seed stage capital: This is when capital is provided to help entrepreneurs conceptualize ideas. Pre-seed businesses are routinely introduced to Venture Capital funds through incubators (I.e., accelerators), which are nurturing collectives that support tech entrepreneurs and promote their networking efforts.
- Seed-stage capital: This is capital generally provided to help entrepreneurs develop new products and conduct market research.
- Early-stage capital: This capital is widely used to finance the commercial production, marketing, and sales of products.
- Later-stage capital: This capital is commonly invested after a business has generated revenue but before it's taken public through an initial public offering (IPO).
Differences and Similarities Between Private Equity and Venture Capital
Differences (for instance and not limited to:)
- Amount of equity obtained
With Private Equity, investors often assume a 50% to 100% majority stake in the companies they fund. Contrarily, Venture Capital investors often receive 50% or less of a company’s equity.
- Type of companies and lifecycle
Private Equity generally invests in well-established companies in "traditional” industry sectors, such as manufacturing, infrastructure, real estate, and food & beverages. Venture Capital investors lean towards targeting start-up companies within innovative sectors like software, biotech, media, and entertainment.
Similarities (for instance and not limited to:)
- Capital Invested
The capital invested in both Private Equity and Venture Capital is customarily sourced from people or institutions with substantial assets, including foundations, corporate pension funds, funds-of-funds, insurance companies, family offices, and high-net-worth individuals.
Private Equity and Venture Capital funds largely invest in private companies with the goal of generating returns by bringing companies to market through an initial public offering or otherwise realizing a profit through the sale of all or a portion of the company in some other “exit” event. With Forge’s cutting-edge technology, investors gain the ability to source opportunities and efficiently buy and sell private shares in some of the world’s most innovative companies.