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Private Equity Vs. Venture Capital: Key Differences

private equity vs venture capital

Private equity vs Venture capital – In most cases, people get confused about these two terms and want to know the differences between them. In some cases, they are even used interchangeably. But you must understand beforehand that these two terms do not refer to the same thing. However, in both cases, the terms refer to firms that invest in private companies and keep equity in exchange.

In this article, you will learn in general about private equity and venture capital. Furthermore, we will also discuss the major differences between the two terms. Finally, we will share with you some of the important details regarding private equity and venture capital. Hence, to learn in detail about both these terms, read on through to the end of the article.

Private Equity Vs. Venture Capital – Definitions

Private Equity Vs Venture Capital - Definitions

According to Investopedia,

Private equity is sometimes confused with venture capital because both refer to firms that invest in companies and exit by selling their investments in equity financing, for example, by holding initial public offerings (IPOs). However, there are significant differences in the way firms involved in the two types of funding conduct business.”

Both private equity and venture capital make investments in companies of different types and varied sizes. As they do so, they commit different sums of money and claim different equity percentages in the companies in which they are making investments.

Before we learn the differences between private equity and venture capital, it is essential to understand the definitions of the two terms.

Read More: Business Venture Definition, Types, And How To Start?

Private Equity

Private equity refers to a group of investors that make direct investments in a company. These types of investors mainly focus on investing in established companies (and generally shy away from startups). This is done in order to minimize the risk profile of investments and instead allow focus on long-term objectives and growth. With some groups like the Acacia group, there are certain kinds of businesses that are targeted with investment due to knowledge held by any given Acacia equity investment specialist who is looking for new investment opportunities. Having this specialization allows private equity firms to narrow their focus and provide better value to a business in order to help it grow (and generate higher returns on investment).

Other kinds of private equity firms might buy a business in a downturn, improve its operations in the marketplace, and then sell the business to make a profit. The major goal of the private equity investor is to increase the worth of a particular company so that the company generates a better return on investment than the private equity made.

Venture Capital

Venture capitalists are behind the running and functioning of a venture capital firm. Venture capital is also a form of private equity, but there is a difference. A typical private equity firm prefers to invest in stable companies, while venture capital invests in risky startups that have immense growth potential.

Basically, all venture capital firms are private equity firms, while all private equity firms are not venture capital. Venture capitalists provide venture capital to mostly small companies. To ensure that there is a good return on investment, venture capitalists unusually get involved in the decision-making of the business.

Private Equity Vs. Venture Capital – Major Differences

Private Equity Vs Venture Capital - Major Differences

According to Wall Street Mojo,

Both private equity and venture capital make their investments in the companies. However, in the case of private equity, investment is generally made in the companies in their mature stage of working. In contrast, in the case of venture capital, investment is made in the companies in their early stage of working.

Before you understand the major differences between private equity and venture capital, it is important for you to understand that both these types of companies make money after exiting. That is, both of them make profits after selling their investments. However, both of them follow different methods of doing so.

The first difference is that private equity firms invest in and buy public companies that are in their mature stage, while venture capital invests in early-stage companies and startups. 

While private equity firms invest across all industries, venture capital mainly focuses on technology, cleantech, and biotech, that is the ones that have future returns.

In most cases, private equity firms buy 100% of a company in LBO, while venture capital buys only a minority part of a company. However, it can be up to fifty percent.

Since private equity firms buy mature companies, their investments are large, ranging from $100 million to $10 billion. On the other hand, since venture capital firms deal with smaller companies, their investments are mostly up to $10 million.

To generate capital for investments, private equity firms combine equity and debt, while venture capital firms only make use of equity to make an investment.

Few Things To Consider For Private Equity And Venture Capital

Few Things To Consider For Private Equity And Venture Capital

According to USChamber.com,

One of the advantages of bringing on a private equity investor is that you’ll have access to more than just cash— you’ll also get that person’s expertise. If they have experience within your industry, a private equity investor may help you find opportunities for improvement.

However, private equity firms get to say how a business is run, as they take a majority stake in the company they are investing in. In some cases, they even have the power to make calls for changing executives. If they think it is the right move, only then do they consider selling the company to make profits with equity.

When a venture capital firm funds a company, it is really very helpful for the latter since they are not mature enough to make great returns. Furthermore, venture capital firms also share their knowledge and expertise in the decision-making process, which helps minimize unnecessary risks and mistakes startups make initially. Venture capital firms also come with various experienced connections, which help the new companies a lot.

Read More: Difference Between Entrepreneur And Entrepreneurship With Examples

Final Thoughts

Hope you have found enough information regarding private equity vs venture capital. You can understand from this article that private equity is what an investment firm invests in a company or other entity that is not publicly listed or traded. Venture capital is a firm that funds startups and other young businesses that have good growth potential.

Both private equity and venture capital buy companies of different types and sizes, claim different equity amounts, and invest different amounts of money. Do you have any further information to add regarding the differences between these two terms? Share your views with us in the comments section below.

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Soumava Goswami

Inspired by The Social Network, Soumava loves to find ways to make small businesses successful – he spends most of his time analyzing case studies of successful small businesses. With 5+ years of experience in flourishing with a small MarTech company, he knows countless tricks that work in favor of small businesses. His keen interest in finance is what fuels his passion for giving the best advice for small business operations. He loves to invest his time familiarizing himself with the latest business trends and brainstorming ways to apply them. From handling customer feedback to making the right business decisions, you’ll find all the answers with him!

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Fundamentals of Pattern Day Trading

What is Pattern Day Trading? – Fundamentals of Pattern Day Trading

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The approval and disbursal system is instant, happening on the same day as you applied or the next day. Applying for this loan is hassle-free since it requires only a few documents. Also, the entire process is online. If you get this loan and repay it on time, then your credit score will increase! Upwards Personal Loan Eligibility Criteria If you wish to know whether you are eligible to apply for an Upwards personal loan, then you are in the right place. There are a few eligibility requirements that you must meet before you can apply for a loan, unlike LazyPay. These requirements are: You must be a resident of India with all legal certifications to prove your Indian citizenship. Regarding your age, you must be at least 21 years of age to apply for an Upwards personal loan. You must be under current employment and should have a base salary of INR 20,000 per month. When it comes to your credit score, it must be above 600. How To Apply For Upwards Personal Loan? If you wish to apply for an Upwards instant personal loan, there is a simple process to follow. In addition, you must also provide some basic necessary certifications. Documents Required The documents that you must show before you can apply for a personal loan are: Address Proof: Any ID card (like a Voter ID card or Aadhar Card) that can prove your current address. PAN Card: Your PAN Card is required for checking your credit score and more as per RBI (Reserved Bank of India) regulations. Bank Statement: You must present a printed or digital form of your bank statement to show whether your account is legit or not. Salary Payslips: When requested, you must showcase your salary payslip for the last three months as proof of employment. Application Process The Upwards personal loan application process is pretty simple and hassle-free. Here are the steps that you need to follow: First, you must learn how to manage upwards loans. You can do so through the Upwards app. Download it for free from the PlayStore (Android) and App Store (iPhones). Next, you must Upwards login by using your GMail account or Facebook account. After you have done so, open the app and click on Apply Now. Here, you must upload digital copies of the necessary documents, like your Aadhar Card, PAN Card, salary payslips for the last three months, and your bank statement. Now, you must fill in the application form. After you have filled out the form, click on the Submit. After you have filled out the application form and providing all necessary documents, you must wait for approval. You will get an approval mail within the same day if your application gets approved, that is. If you do get the loan approval mail, you will be contacted by an Upwards executive. You now have to agree on the loan terms online over the phone. After an agreement is reached, you will receive your personal loan money within 48 hours! If you do not receive the money, then you must contact Upwards customer care immediately. Benefits Of Upward Personal Loan There are several benefits of the Upward personal loan. It can help you in different means. You must know the facts perfectly while attaining your objectives with complete ease. Ensure that you follow the correct process in this regard. Some of its key benefits are as follows:-       1. Structured Repayment Option Upward personal loans typically come with fixed monthly payments over a set period, making it easier to budget and plan for payments. You need to get through the complete process that can make things easier for you in attaining your requirements with ease. 2. Offers Flexible Loan Amounts  Borrowers can often access a range of loan amounts, allowing them to borrow what they need based on their financial requirements. The flexible loan can sort out your financial needs when you require it the most. Once you follow this process, things can become easier for you. 3. Predictable Interest Rates These loans commonly have fixed interest rates, providing predictability in monthly payments throughout the loan term, even if market rates change. You must get through the predictable interest rates that can boost your brand value to the next level. 4. Builds The Credit History Consistent, on-time payments on an upward personal loan can positively impact credit scores, contributing to an improved credit history. Once you have a trusted credit history things can become easier for you to get the loans on time. 5. Quick Access To Funds Depending on the lender, approval and funding for upward personal loans can be relatively quick, allowing borrowers to address financial needs promptly.  You will get quick access to the funds to make things happen in your favor. 6. Variety Of Uses These loans can be used for various purposes, such as debt consolidation, home improvements, major purchases, or unexpected expenses, providing flexibility in how the funds are utilized. The loan amount you can use for a variety of purposes. Remember that while upward personal loans offer numerous benefits, borrowers should carefully assess their financial situation and ability to repay before taking on any loan. Understanding the terms, fees, and potential impact on credit is essential in making informed borrowing decisions. Conclusion: Is Upwards Legit? If you think Upwards is fake, then you are wrong. This company is 100% legit. However, the only difference you will find is the time taken to receive your personal loans. While the Upwards website claims that you can get your loans in the same day, it actually takes more time than that. 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