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Venture Capital and Private Equity : What’s the Difference 

Understand whether private and venture equity setup would best suit you if you're a business founder or looking to establish your own firm soon. Know more.

By teammarquee . October 27, 2022

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As the name suggests, private equity is the investment fund where investors usually purchase a stake in privately held firms. As per Bain.com, private equity generated around 512 billion dollars in buyout deal value in the first half of 2022.

India is a huge market for both private equity and venture capital investment. Private equity investments first saw the shining light in India in 1999 when Bharti Airtel’s deal with a private equity firm happened, and it allowed the company to raise around $292 million. The fresh input of put worked wonders for the company, and it grew from just two mobile telecom circles to 23 telecom circles in a short period.  

Funding equity is essential for every startup to achieve its peak. 

In the case of private equity funding, the assets of multiple equity managers are combined, and then these pooled assets are used to acquire massive stakes in the companies or even an entire company. It is essential to understand that the investors might purchase the whole company during private equity funding. However, one must note that private equity firms do not retain this ownership for an extended period. Rather, they prepare an exit strategy in mind at the time of purchase.

When equity managers purchase a company on such norms, they usually improve its operations and management and then sell it at a considerable profit to generate a return on investment. They may also buy out a company that has run out of business or is in distress. 

Let us now look over to Venture Capital. It is a kind of financing often provided by venture capitalists in lieu of some percent of the stake of the company they are investing in. Venture capital firms generally invest in startups in the early stages of operation. They take a considerable amount of risks when funding early-stage startups. They understand some crucial parameters before investing. 

Some of the parameters are 

  • The high growth potential of the company
  • Specific characteristics of the founders, such as their passion, risk-taking attitude, extreme perseverance, problem-solving skills, etc., 
  • Innovative ideas
  • Sustainability in the long run 
  • Existing or potential market demand for the product.    

   . 

In this blog, let us understand the pros and cons between venture capital and private equity funding. We will also understand which kind of equity setup would best suit you if you’re a business founder or looking to establish your own firm soon. 

Difference between private equity and venture capital

Before understanding the difference between venture capital and private equity, it is essential to understand the similarity between the two. In both forms of investing, the companies take the help of outside investors by allowing them to put investors’ money into their company. 

One of the key advantages of both forms of investments is that you get a massive cash inflow with the right expertise. Mentorship in businesses multiplies the chances of growth for the business. With business mentors on your side, you can analyze the opportunities, understand the firm’s challenges, and scan future threats. 

Let us quickly look at the difference between venture capital and private equity

Risk: When it comes to venture capitalists, they usually look for companies with extremely high growth potential. Hence, they are willing to take on more risk by investing in a particular company. Venture capitalists typically invest in startups and early-stage companies which have the potential to grow fast. 

On the other hand, equity investments are usually made in already-established companies. As explained earlier, equity investors might undertake companies suffering from poor supply chains, ineffectual leadership, and poor systems and processes. The return on investment is generally lower as the companies are usually established; hence, the risk is lower.  

Earning strategy: The venture capital investors are interested in the company’s higher growth and enhancement of profits for a continuous period as they have a stake in the company and are not looking for an early exit. 

On the other hand, private investments improve the business by removing its flaws so that they can sell the venture for a profit. Just like venture capital investors, their motive is not to remain invested in the business for long.  

Stake in the business: The outside investors invest their time, effort, and money only to get a stake in the business. As the venture capitalists or equity investors get a stake in the company, they can make decisions that would enhance the company’s overall profitability, revenue, cash flow, and sustainability of the product of the company. Understanding the stake of venture capital and private equity investors is essential. 

Private equity firms usually have a majority stake in the company, which gives them total control of the company post-buyout. This allows them to enhance the growth and even sell the company eventually. On the contrary, VC investors have a lesser stake in the company, and the majority of stakes lie with the company’s founders.  

Initial size of investment: There is a considerable difference between the initial size in both these kinds of investments. As per the statistics by Pitchbook, around 25 percent of private equity deals which happen in the US are usually between $25 million and $100 million. On the other hand, most of the VC funding in the US during the series A rounds is lesser than $10 million.  

Vc fund(Venture Capital) is a better option for expanding the company if the founders are looking for funds for startups. Equity investments are detrimental to founders as they will take away most of the company’s ownership and give it to investors.  

Conclusion:

Startup investing should be done cautiously as the same might dilute the funds of startups, which might affect the company’s stakes. Before leveraging various options, it is appropriate to reach out to the best consultants experienced in private investments and vc funding. They would suggest the best suitable options for startup investing after considering your company’s situation, challenges, risks involved in your industry, and opportunities ahead. 

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FAQs


The private equity companies mostly invest in already established companies irrespective of their revenue and mostly buy 100% equity of the companies in which they invest. Venture capitalists on the other hand, mostly invest in startups or companies which have a high growth potential. Venture capitalists generally buy 50% or less of the equity on the firms.

Venture capital funding is generally made at 3 main stages in a business, these phases are: Early stage financing, Expansion financing, and Acquisition/buyout financing.

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