Private Equity (PE) and Venture Capital (VC) funding are both considered Alternative Investments, but there are significant differences between the two.

What Is Private Equity (PE)?

PE is an Alternative Investment class. PE is composed of funds and investors that directly invest in private companies, or that engage in buyouts of public companies, Real Estate Acquisitions, and Management. Institutional and retail investors provide the capital for private equity, and the capital can be utilized to fund to create cash flow & balance sheets, mergers & acquisitions, expand working capital, and more.

A Private Equity fund has Limited Partners (LP), who typically own shares in a fund and have limited liability, and General Partners (GP), who have full liability. The latter is also responsible for executing and operating the investment.

What is Venture Capital (VC)?

VC is a form of Alternative Investment and a type of financing that investors provide to startup and high-tech companies that are believed to have long-term growth potential, Pre – Initial Public Offerings (IPOs). VC generally comes from HNW, Angels, well-off investors, investment banks, financial institutions.

Though it can be risky for investors who put up funds, the potential for above-average returns is an attractive payoff. unique patents, medical research, VC funding are increasingly becoming a popular – even essential – source for raising capital, especially if they lack access to capital markets, fintech, debt instruments. The investors usually get equity in the company, and, thus, a say in company decisions.

Funds are Funds, isn’t it? Private Equity and Venture Capital are two ways business/project entrepreneurs can shore up cash to run or grow their enterprise. Many business/project entrepreneurs think these two funding options are interchangeable, however, there are huge differences.

The Main Differences Between Equity Capital and Venture Capital

PE firms usually do an acquisition of mature companies that are already established and have good potential and portfolio. The companies may be deteriorating or failing to make the profits they should due to inefficiency. PE firms purchase these companies and streamline operations to increase revenues. VC firms, usually invest in startups with high growth potential or Pre-IPO.

PE firms usually do an acquisition of the ownership of the companies in which they are ready to invest. VC firms invest up to 50% of the equity. 95% of VC firms prefer to spread out their risk and invest in many different companies. If one startup fails, the entire fund in the venture capital firm is not affected substantially.

PE firms expect few to none of their investments to fail in fact they are Value Investments. VC firms expect most of their investment to fail.

PE firms are generally looking to make 300% – 400% of their funds as a return in 4-5 years. VC firms are hoping to make 1000% to 10000% of their funds.

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