If you are looking for funding for your business, you may have come across venture capital and private equity. These financing options can help grow your company, but each has unique features. The following is an outline of their key differences.
Venture capital focuses on start-ups with high growth potential. The venture capitalist offers the company owner money in exchange for equity. They also bring valuable information regarding market conditions and tips for running the business.
Private equity focuses on already established companies. They consider companies facing financial issues due to various problems, such as poor management. Private equity offers the company owner money in exchange for ownership. They also provide valuable advice on improving the business and making it more profitable.
According to Brad Kern, venture capital focuses on small companies. These companies have few financial requirements. Hence, the venture capitalists would also offer a substantially small amount in exchange for equity.
On the other hand, private equity focuses on large and already established companies. Such companies would require huge sums of money to resume normal operations or eliminate financial challenges. Hence, the private equity firm would offer a large sum to cater for necessary expenses.
When financing a venture, most business owners focus on the collateral needed in exchange for the loan or amount offered. In the case of venture capital, the individual would require a share of equity in the company. The equity offered is equivalent to the money allocated; therefore, the business owner would have no loans to repay.
In the case of private equity, the financier offers the company money in exchange for ownership. It involves an investment option whereby the investor buys a company and manages it before selling. Therefore, choosing the private equity option to finance your business means losing ownership.
Venture capital does not involve many risks because the company invests in many start-ups by offering substantial money. These companies have a high risk of failure, which could result in the venture capitalist losing money. However, the diverse investments cushion the venture capitalist’s money. The profits from several companies could cushion the losses incurred on one of the investments.
When investing in companies, private equities risk a lot. They offer large sums of money to already established companies and, in turn, make few investments. Therefore, a loss from one company would cost the private equity a lot of money. This explains why these companies invest in established businesses with minimal chances of failure. They conduct a lot of analysis before deciding where to invest. The returns these investors make depend on the profitability of the companies at the top of their portfolios.
When choosing between venture capital or private equity, it’s important to consider all the necessary details. For instance, private equity would suit your needs if a company has become nearly impossible to run. In the case of a start-up, venture capital would work best. It would offer you money without worrying about debt repayment.