January 27, 2023

Venture capital v/s Private Equity – Which is Suitable for Your Business?

As a potential entrepreneur, if you are seeking revenue-based funding, you would want to know about venture capital and private equity. They are sometimes misunderstood since both refer to entities that invest in enterprises and exit by selling their investments in equity financing. However, there are considerable distinctions in how the two sorts of fundraising are conducted. 

While there are some parallels between the two sources of finance, a venture capitalist and private equity company work in quite different ways. In this article, you will learn why venture capital and private equity are both worthwhile options, as well as everything else you need to know to make an informed choice.

Private Equity vs. Venture Capital: Top 10 Differences

Alt text: – Infographic image of Venture capital vs Private Equity 

What is Private Equity and how does it work? 

Private equity refers to investments in company shares that are not publicly listed. This investment capital is provided by wealthy individuals or businesses. Private equity companies often take possession of a public business, which they then take private by delisting the company’s shares from all stock markets.

How does a Private Equity firm create value?

Typically, a private equity firm would acquire a company that is in financial distress and has inadequate management. To enhance operating procedures, the corporation will restructure its debt and engage new management. While no company enjoys debt, the idea of a takeover by a private equity group with the resources for a huge, long-term overhaul project is useful, especially if significant changes are required.

What is Venture Capital and how does it work?

Venture capital is a type of financial investment made by affluent individuals known as venture capitalists in new start-ups and growing firms. Several venture capitalists typically pool their resources to create a limited partnership and find prospective start-ups or rising high-growth enterprises together. The group will acquire an equity stake in the firm and utilize its combined assets to help it develop.

How does a Venture Capital firm create value?

A venture capitalist is more than simply a silent partner with large sums of money; they may bring more to the table for new businesses. VC partners attend several board meetings to keep track of their investments. This experience becomes a valuable resource for businesses over time. Furthermore, once they have a stake in the company, venture capitalists may become a driving force in sales and fundraising efforts. They also have strong relationships with senior people with specific expertise, which may assist businesses in their early stages.

Similarities between VC and PE:

Private equity (PE) and venture capital (VC) are two main subcategories of the private markets, which constitute a far broader and more complicated segment of the financial landscape. Both PE and VC firms raise pools of funds from authorized investors known as limited partners (LPs) to invest in privately held enterprises. Their objectives are similar: to raise the value of the firms in which they invest before selling them—or their equity share (aka ownership) in them—for a profit.

What are the main distinctions between VC and PE funding?

 The differences between venture capital and private equity have been explained below: 

  1. Private equity is intended for business owners who are willing to relinquish control of their activities. Venture capitalists are only interested in a minority share.

     
  2. Private equity companies outnumber venture investors, making it simpler for entrepreneurs to raise funding. A private equity business casts a wider net, investing in a variety of sectors. A venture capital business is exclusively interested in promising start-ups.

     
  3. Both PE and VC investors bring knowledge and skills to the table, but PEs want a faster return on their investment than a VC, who is ready to wait for the dividend.

     
  4. PE and VC firms invest in businesses of various sizes. Private equity firms will not invest in a company that has no sales, while a venture capital firm would.

     

While both types of corporations invest in a variety of companies and sectors, venture capital firms are significantly more interested in unique business concepts. Venture capitalists are especially interested in technology firms. PEs value predictability and prefer companies in well-established markets.

If you just want to get funding for your business in a short amount of time, revenue-based financing offered by Velocity is the way to go. Here, borrowers can get credit from the lenders by pledging their revenue share and then repaying the principal amount and revenue share to the lender. You may locate a partner who can help elevate your business if you carefully analyze where the position of your start-up is today and where you want it to go with it in the coming future.