A quick outline of the key differences between private equity and venture capital
Private equity and venture capital are types of investment firm. They both invest in private companies aiming to multiply their investment and then sell their ownership or shares. But there are several key differences between the two.
Timings and stage of investment
Venture capital firms invest in small companies with great potential for growth that are still in early stages and need help scaling up. These are typically called startups. Venture capital investors usually support a company for 4 to 7 years before selling their portion of ownership. This type of investment is how Uber raised investments of over $38 million in just two years.
Private equity firms, on the other hand, invest in more mature companies with larger capital requirements. These later stage companies also benefit from the private equity investors’ experience and expertise over the 6 to 10 years that the firms spend with them before selling.
Venture capital investments tend to be riskier than private equity, as they finance start-ups, where success is unpredictable. While venture capital investors consider companies with solid business models and business plans, the companies are still relatively young and may struggle against competitors.
Traditional private equity investors lean towards lower-risk opportunities with more developed companies. These need expanding and streamlining but have the infrastructure and market for success. Private equity firms may even navigate the company toward an initial public offering (IPO), which offers greater returns on their investments.
Size of investment and equity
Venture capital investments are usually up to a maximum of $10 million in return for a maximum of 50% equity. Venture capital investors are aware of the risks and typically have investments in several startups, so that if one fails, the VC firm is not significantly affected.
Private equity firms are more likely to buy larger percentage ownership, which can be an investment upwards of $100 million. These firms may concentrate on a smaller number of investments at one time, depending on the size of the investment firm itself. By owning larger portions of companies, private equity firms can use their experience to provide guidance that positively influences the future of the company.
Type of company and investment
Venture capital investors are generally more limited in the types of companies they can invest in. The industry is often defined by its speciality in investing in technology startups, with large venture capital hubs located in similar locations to tech hotspots like Silicon Valley.
Private equity uses both cash and leverage in their investments. Using leverage refers to a loan or sale of bonds that are then paid back over time as the company becomes more profitable. This allows companies that would otherwise be unable to access adequate funding to get the resources they need to develop innovative ideas.
FTL is different from traditional private equity firms because of our ability to manage risk and structure capital intensive projects. This allows us to provide capital for companies that traditional investors can’t. We fund innovation in energy, industrial technology and the life sciences. Learn more about what we do here.