Private Equity vs. Venture Capital

 Private equity is an alternative investment class and consists of capital that is not listed on a public exchange. Private equity is composed of funds and investors that directly invest in private companies, or that engage in buyouts of public companies, resulting in the delisting of public equity. Private equity investors raise pools of capital from limited partners to form a fund which is known as a private equity fund for the purpose of investment in a company.

The private equity industry is composed of institutional investors such as pension funds and large private-equity (PE) firms funded by accredited investors. As private equity entails direct investment, it often to gain influence or control over a company's operations i.e. a significant capital outlay is required, which is why funds with deep pockets dominate the industry.

The underlying motivation for such commitments is the pursuit of achieving a positive return on investment (ROI). Partners at private-equity (PE) firms raise funds and manage these monies to yield favorable returns for shareholders, typically with an investment horizon of between four and seven years.

Venture Capital is such financing given to startup companies and small businesses that are seen as having potential to breakout i.e. when the price of the asset moves above a resistance area or below a support area. The funding for this financing usually comes from wealthy investors, investment banks, and any other financial institutions. The investment does not have to be financial, but can also be offered via technical or managerial expertise.

Investors providing funds are gambling that the newer company will deliver and will not deteriorate. However, the tradeoff is potentially above-average returns if the company delivers on its potential. For newer companies or those with a short operating history—two years or less—venture capital funding is both popular and sometimes necessary for raising capital. This is particularly the case if the company does not have access to capital markets, bank loans, or other debt instruments. A downside for the fledgling company is that the investors often obtain equity in the company and, therefore, a voice in company decisions.

Key Differences between Equity Capital and Venture Capital

• Private equity firms mostly buy mature and established companies. The companies may be deteriorating or failing to make the profits which are due to inefficiency. Private equity firms buy these companies and streamline operations to increase revenues. Venture capital firms, on the other hand, mostly invest in startups with high growth potential.
  
  
• Private equity firms mostly buy 100% ownership of the companies in which they invest. As a result, the companies are in total control of the firm after the buyout. Venture capital firms invest in 50% or less of the equity of the companies. Most venture capital firms prefer to spread out their risk and invest in many different companies. As a result, if one startup fails, the entire fund in the venture capital firm is not affected substantially.
  
  
• Private equity firms usually invest $100 million and up in a single company. These firms prefer concentrating all their efforts on a single company as they invest in already established and mature companies. The chances of absolute losses from such an investment are minimal. Venture capitalists typically spend $10 million or less on each company since they mostly deal with startups with unpredictable chances of failure or success.