Private Equity v. Venture Capital
Differing Investment Types
In comparison to PE, VC firms invest in companies that are in the early stages of development. VC firms analyze and predict the potential for growth in new companies, and take up a minority share, in hopes of seeing future growth. While in some sense VC can be riskier than PE because it’s difficult to predict the future success of a start-up company, VC firms mitigate this risk by making smaller investments in many different companies. Unlike PE, a typical seed VC investment is less than $10 million (however investment sizes may increase sizably depending on the stage of development that the company is in.)
PE investments are structured through both equity and debt. Equity is money given to the company in exchange for partial ownership, and a voice, in the company. Debt, however, is a loan (ex. from the bank) that must be paid back, often with interest. VC, however, is structured solely through equity. Another major difference between PE and VC is the length of time the firm invests in a company. While PE invests in companies for a longer duration (6–10 years, on average) VC firms will hold on to their shares for less time, exiting the investment once the company either gets acquired or IPOs (around 4–7 years.)
What’s their relationship?
Technically speaking VC is a type of PE! While PE and VC have many differences in their structures and styles of investment, VC is a subset of PE. Both PE and VC firms invest in companies they believe have a large potential for growth. While PE firms choose fewer companies to invest more money in, VC firms hedge their bets on many companies, investing less money in each. No matter the style of investment, both firms have the same plan and end goal: invest in companies destined for future growth, help the company achieve this growth, and finally, sell off ownership (shares) of the company once the investment firm has made adequate returns on its initial investment.