Private Equity and Venture Capital
Private equity is sometimes confused with venture capital because they both refer to firms that invest in companies and exit through selling their investments in equity financing, such as initial public offerings (IPOs). However, there are major differences in the way firms involved in the two types of funding do things. They buy different types and sizes of companies, they invest different amounts of money and they claim different percentages of equity in the companies in which they invest.
Private equity firms mostly buy mature companies that are already established. The companies may be deteriorating or not making the profits they should be due to inefficiency. Private equity firms buy these companies and streamline operations to increase revenues. Venture capital firms, on the other hand, mostly invest in start-ups with high growth potential.
Private equity firms mostly buy 100% ownership of the companies in which they invest. As a result, the companies are in total control of the firm after the buyout. Venture capital firms invest in 50% or less of the equity of the companies. Most venture capital firms prefer to spread out their risk and invest in many different companies. If one start-up fails, the entire fund in the venture capital firm is not affected substantially.
Private equity firms invest $100 million and up in a single company. These firms prefer to concentrate all their effort in a single company, since they invest in already established and mature companies. The chances of absolute losses from such an investment are minimal. Venture capitalists spend $10 million or less in each company, since they mostly deal with start-ups with unpredictable chances of failure or success.
Private equity firms can buy companies from any industry, while venture capital firms are limited to start-ups in technology, biotechnology and clean technology. Private equity firms also use both cash and debt in their investment, but venture capital firms deal with equity only.
These observations are the common cases. However, there are exceptions to every rule; sometimes one firm type does things out of the norm for its kind.