Venture capital and private equity both involve investment in companies so as to manage the company and once the company starts earning decent profits then both venture capitalist as well as private equity player exit from the company by selling their stake in the market at a good valuation. However one should not make the mistake of thinking that both venture capital and private equity are same which is not the case as there are many differences between the two, let’s look at some of the differences between venture capital and private equity –
Venture Capital and Private Equity Differences
Type of Companies
A venture capitalist invests the money into startups or new companies which have not established themselves but have a unique business model or business idea while private equity players invest the money into already established companies which have proven themselves over the years but currently are going through a rough phase.
Amount of Investment
The amount of investment in case of venture capital is low as new companies or startups do not require that much amount of capital while the amount of investment in case of private equity is much higher as compared to the amount required in venture capital because established companies require higher amount of capital in order to stage a comeback. In simple words, the amount of investment required in case of private equity is 5 to 10 times higher than the amount of investment required in the case of venture capital.
Diversification
In case of venture capital amount of investment is low which ensures that a venture capitalist can invest into 5 or 6 startups rather than investing the whole amount into one startup which gives benefits of diversification while in case of private equity the amount of investment is large and that is the reason why private equity players usually invest into only one company. In simple in case of venture capital all eggs are not kept in one basket that is failure of one startup can be compensated by success of other startup but in case of private equity all eggs are kept in one basket implying that if the company in which investment is made then it will result in loss of entire capital of private equity player.
Risk Factor
Venture capital involves investment in startups and we all know that majority of startups fail which makes venture capital more risky as compared to private equity where the risk factor is less as one is investing the capital into already established companies. In simple words when it comes to risk than venture capital investment is riskier as compared to private equity investment.
Listed and Unlisted Companies
A venture capitalist invests the amount in unlisted companies and once the company is successful than venture capitalist can think about listing the company in stock exchanges but as far as private equity players are concerned they invest capital into both listed as well unlisted companies. In simple words, the reach of venture capital is limited to startups or unlisted but as far as private equity is concerned its reach is much wider as it invests their capital in both startups as well as listed companies.
As one can see from the above differences that both venture capital and private equity are poles apart from each other and any individual or company thinking of becoming venture capitalist or private equity player should carefully read above points and then decide which route to choose between the two.