Private Equity vs Venture Capital

How can one compare private equity vs venture capital? Private equity is often confused with venture capital because they both involve investing capital in companies in exchange for equity.

However, there are significant differences in how these firms operate and why they fund different businesses. In private equity, firms typically invest in mature companies that are not publicly listed or traded. Venture capital firms often have portfolio companies that are young businesses with incredible growth potential. Let’s compare private equity and venture capital.


Compare and Contrast: Private Equity vs Venture Capital

Private Equity

In private equity, capital invested is represented in shares, or partial ownership of the company. Funds come from wealthy individuals, insurance companies, pension funds, and endowments. The investors in a private equity fund focus on more mature companies. Sometimes funds are provided to businesses in distress or businesses are purchased to improve their operations, and then sold for a profit. A private equity investor’s goal is to always increase the company’s value so that they can generate a return on their investment.

A private equity investor often takes a majority stake in the invested company, and therefore has significant authority to decide how the business operates. A majority investment in a company means that a private equity investor has control to get rid of executives and/or make major changes to the business. A private equity investor don’t necessarily need to acquire 100% equity of the company, but at least 51% to have controlling share. As a result, private equity deals/acquisitions are far more expensive.

The leveraged buyout or LBO is a subset of private equity, in which the private equity investor assumes control of a business using debt financing, which is then paid down via the company’s operational cash flows.  The famous book Barbarians at the Gate chronicles the famed buyout of RJR Nabisco.


Venture Capital

Investors in venture capital prefer investing in companies during the startup phase. They typically fund smaller, young companies that have potential for long term growth. The VC firm invested in these companies can share their knowledge and expertise as to growing a successful business in a specific industry.

New businesses have a high rate of failure, so it is to the venture capital investor’s advantage to bring in an experienced team for guidance. Additionally, venture capital investors tend to be well connected and can help startups find new opportunities. Venture capital funding is sometimes necessary for startups in earlier stages to raise capital and fuel growth.

In contrast to private equity investors, venture capital investors typically have a minority stake in the underlying business.  Venture capital firms own 50% or less of the company’s equity. Venture capital financing usually comes from wealthy individuals, investment banks, and specialized VC funds. Not all investments are financial, sometimes it can be offered as a technical or managerial support. Most venture capital firms invest in many different companies in order to spread risk. Therefore, if one startup fails, the entire venture capital firm is not impacted significantly.

A crucial difference is that venture capital investors will be open to investing in companies that are not profitable.  By contrast, private equity investors almost always require profitable operations.


Different Risk and Return Profiles

In private equity investment, the return is lower, but so are the risks. A private equity firm isn’t interested in being involved with the business for a long time; it is looking to improve a business and eventually sell for profit.

Venture capital investors, on the other hand, want to invest and partner with companies with high growth potential. As a result, they are willing to take on more risk. The startup funding provided by venture capitalists allows these new businesses to become attractive to private equity buyers or appropriate for investment banking services.

We, at Omega Venture Partners, are an industry-leading technology venture capital firm. We are dedicated in identifying, qualifying, and investing in companies at the inflection point in their early-growth stage. Our venture capital firm has a unique focus to invest in rapidly growing software businesses that leverage artificial intelligence, machine learning, data science, and automation to bring transformative solutions. Omega Venture Partners includes individuals from some of the world’s most innovative and forward-thinking institutions who can advise companies and accelerate their trajectory. Our investment goes beyond capital. It is a commitment we make to our partners to help them grow and succeed.

We hope you enjoyed learning about private equity vs venture capital. For more blogposts like this one, please visit the Omega Venture Partners website.