If you’ve been around the world of investments, you’ve probably heard terms like “venture capital” and “private equity”. Want to learn about venture capital vs. private equity? Are they the same? Are they different? Read on to learn more about VC, PE, and Omega Venture Partners!
Venture Capital
What is Venture Capital?
We’ll start with VC. What’s a venture capital firm? If you decide to invest in an early-stage company, you can either use your own intuition and knowledge, or contribute to a fund that will be used to finance a wide range of small businesses. Venture capital is based on the latter; VC firms collect capital from investors (often referred to as Limited Partners) and then invest in startups with growth potential. Since VC funds require a network of highly experienced team members, this method is often much less risky than investing in companies based solely on one’s own expertise.
What is a Venture Capital Example?
Omega Venture Partners is a great example of a venture capital firm. Omega is a premier technology investment firm headquartered in Palo Alto, California. Omega focuses on investing in early-growth and early-stage companies with immense potential in the artificial intelligence, machine learning, data, and automation industries. Read more about the firm here!
Is Venture Capital a Good Career?
We certainly think so! The venture capital world is filled with opportunities, and getting involved gives you the chance to not only earn a large return on your investment, but also make decisions that help the entire world. Venture capital firms like Omega get to invest in companies that they believe will create a freer, fairer, and more prosperous society. Is venture capital a prestigious career? If you think of “prestigious” as meaning noble, it certainly can be; you have the chance to support companies you believe can revolutionize their industry and be significant job creators!
Does Venture Capital Pay Well?
What’s the venture capital salary? This varies widely from firm to firm. If the team running the VC lacks experience or expertise, they likely won’t make the best investment decisions, and the firm will generate less revenue. However, if a diverse group of experienced investors collaborate to make decisions on the firm’s behalf, venture capital will likely provide a large return. So, do venture capital firms pay well? That depends on which firm you’re referring to!
What do Venture Capital Firms Get in Return?
Venture capital firms play a substantial role in helping small businesses grow into successful and fully operational enterprises. If the team selects the right portfolio companies, they can also generate a large return on investment for the Limited Partners. How does this benefit the firm itself? When a portfolio company use the firm’s funds to create something revolutionary, then the VC firm has directly contributed to something that benefits the entire world. For example, one of Omega’s portfolio companies, Square, has helped hundreds of small businesses create a loyal customer network, manage their sales, and make well-educated business decisions. So, Omega both generated a large return and grew a company that helps others succeed!
Private Equity
What Exactly is Private Equity?
Private equity is simply an investment into a privately owned business, usually for partial or majority ownership. PE firms only invest in private businesses, not companies whose stock is traded publicly. Basically, private equity is an umbrella term for any large investment made into a privately owned business.
Is Venture Capital the Same as Private Equity?
The two are similar, but they are not identical. Venture capital firms like Omega invest in early and expansion-stage companies that are still developing their products and business models. Private equity firms, on the other hand, usually invest in more mature and well-established companies operating at or near full capacity. A VC firm uses its resources to grow its portfolio companies, whereas a PE firm invests with the goal of ultimately improving operations, driving industry consolidation through M&A, and growing free cash flow, Net Income, and EBITDA.
Venture Capital vs Private Equity
Now let’s dive into how private equity and venture capital. How are they different? How are they the same?
What is the Difference between Venture Capital and Private Equity?
As we learned earlier, venture capital and private equity are not exactly the same. Private equity firms seek out established companies that are still privately owned but more mature in their lifecycle. A PE firm typically purchases a majority share of the company, makes any alterations to increase the business value, and ultimately takes the company public or sells it to another PE firm or a strategic buyer to make a return on its investment. Venture capital firms, on the other hand, typically invest in businesses during their earlier, higher-growth stages and augment the growth of the company. For example, Omega Venture Partners invested in Verbit during its early stage, supported the company through growth and subsequent rounds of financing, and earned over a 10X return on it’s original investment.
Is it Harder to Get into Venture Capital or Private Equity?
Both areas of investment require immense experience, dedication, and intelligence. In order to be successful in the world of investment, one must be able to spot opportunities to fund companies that can revolutionize their industries. That means seeing the right deal flow, having the acumen to select well, as well as the capabilities to conduct robust due-diligence.
Which is More Risky: Venture Capital or Private Equity?
The answer is dependent on a number of factors, including the strategy of the specific firm, its portfolio companies, and the decisions made by the firm’s team. Private equity firms are generally less risky, however, because the companies they invest in are already successful and established. Of course, less risk usually means less return. Venture capital firms, on the other hand, invest in smaller companies earlier in their development. By nature, this involves more risk, but in the event that the company funded succeeds, the VC firm receives a far higher return than a typical private equity firm. It’s all about risk versus reward!
Venture Capital vs. Private Equity: Salary
VC and PE both have salaries that vary widely based on a variety of factors. How the economy is doing, the quality of decisions made by the firm, and the performance of portfolio companies all come into play. It’s actually impossible to compare the salaries of the two on a general basis, in part because the work involved on a day-to-day basis is so different.
Venture Capital vs. Private Equity: Returns
Venture capital is higher risk than private equity, but also offers the potential for an exponentially higher return. Since VC firms invest in companies that are relatively young, if that company is successful, VC firms enjoy a much higher return than if a PE firm invests in an already successful company that simply continues to be successful.
If you would like to learn more about Omega Venture Partners, our team, or our portfolio, please feel free to do so!
