Entrepreneurs are sprouting left and right. With more companies being created, the need for funding has risen more than ever. When it comes to funding, there are two kinds of approach when fundraising for capital, which is either through private equity or venture capital. But what exactly is private equity and venture capital? More so, what is the difference between the two?
Let’s take a look:
What Is Private Equity?
Private equity pertains to several shares that will represent your ownership of an entity that’s not sourced from publicly listed shares. This means that other companies or individuals have placed their money in your company in the form of shares, which will serve as your ownership in the company. Private equity in Australia and other parts of the world are funds pooled from high-net worth individuals or firms used for the intention of purchasing shares of a company to attain majority control.
What Is Venture Growth Capital?
On the other hand, venture growth capital are pooled funds given as seed money, especially for start-up companies or small businesses. These kinds of funding usually come from angel investors or investment banks. Sometimes, venture growth capital comes from venture capital contests, wherein start-up companies pitch their ideas. The one with the best idea in that competition wins the venture capital.
What Are The Differences?
At first, a venture growth capital and a private equity might look similar since both provide equity, which is the value or capital of a company. However, that’s a common misconception. Before you can choose which one is best for your business, here are some of the differences between venture growth capital and private equity:
- Stage of the Business
One of the primary differences between private equity and venture growth capital is when and at what stage of the business the funding comes in. Typically, venture growth capital is used to invest in start-ups or new businesses with a high potential for growth. Venture growth capital are investments during the initial stages of the start-up. Some examples of start-ups are Uber, We Work, and similar companies.
On the other hand, private equity is usually invested in established businesses. Private equity usually comes in when the company brings in another investor to improve its operations or increase the valuation of the company.
- Shares of Equity
Another difference between private equity and venture growth capital is how much of the company they buy. Naturally, private equity firms will purchase 100% ownership of the company. This makes the private equity firm the majority owner who controls the company.
On the other hand, venture growth capital only invests 50% into the start-up at most. Usually, a venture growth capital also diversifies their portfolio by investing in different kinds of start-ups to spread out the risk. So, if one company fails, the whole venture growth capital fund doesn’t fail.
- Direction of Creating Value
There is also a difference between private equity and venture growth capital with regards to how they create value. For private equity, growth usually comes from the bottom up. The reason for this is that private equity is generally invested into companies that are in hot water, meaning these are businesses that don’t perform very well. Private equity firms usually come into the picture to enhance operations, products, and improve the company.
Alternatively, venture growth capital invests in companies that are just starting out. Thus, value creation will be coming from the top to the bottom. Venture growth capital provides entrepreneurs with capital to turn their ideas into a real business. This kind of investment creates value out of a simple idea and brings new, innovative products to consumers.This is why it’s also known as seed financing.
- Investment Trigger
Even the investment trigger of each kind is different. For one, private equity seeks companies that are undervalued and could use their expertise to develop the company. This usually happens when the company that’s been in the business for a while loses its touch but still has potential. That’s when private equity comes into the picture.
In contrast, venture growth capital looks for a good management team to start a business and bring it to the top. Venture growth capital is also triggered by start-ups with high potential for growth that are market disruptors. Because of this, venture growth capital bears a higher risk compared to private equity investments.
Although private equity and venture capital are both two ways to raise equity, there are stark differences between the two. Both also serve different kinds of companies, needs, investments, and ownership. Based on the differences and features listed above, you can now decide which one to go for.