If you were to pose any sort of question regarding private equity and venture capital to someone who wasn’t investment-savvy, there’s a high probability that the two terms would become confused.
Private equity and venture capital are regarded as the same type of finance by a lot of quarters when in reality, the difference couldn’t be starker.
It’s for this reason that we have put together this guide. We’ll now highlight some of the differences between the two different types of funding, showing unofficial market rules which seemingly keep them apart.
We should add a disclaimer here; these rules are by no means legally binding, they are just what seem to happen in the vast majority of deals of this ilk.
Private equity firms buy established companies; venture capitalists target start-ups
Again, let’s put the caveat out there that this isn’t official; it’s just what tends to happen amongst investors.
Private equity firms will generally buy those companies that have an established reputation. Take Marc Leder and Sun Capital for example; he has gone on record saying that his company only like to acquire those firms who are established and are market leaders. Sure, these companies might be struggling at the same time – but the occasions of a private equity firm buying a start-up are few and far between.
Venture capital firms meanwhile will almost always only target those companies who are just starting out and have the potential for massive growth.
Private equity firms buy an entire company; venture capitalists invest in just some equity
Next, private equity firms will usually only buy a company 100% outright. This is because one of the main advantages of private equity is the expertise they bring to the table and to be in a position to implement change, they need to have total control.
If we look at venture capitalists on the other hand, it’s rare that they will ever take more than a 50% stake in a company. This relates to the previous issue we looked at; venture capital firms will usually target start-ups. It means that they won’t commit 100% to a project, for the simple fact that it would involve too much risk from the start.
Private equity firms can spend $100m+ on a deal; venture capitalists invest much less
If one were to take a look at all of the deals that have taken place surrounding these types of investors, it would immediately become clear that private equity firms tend to invest a lot more money in their deals. It’s certainly not uncommon for them to pledge more than $100m in one company, with this often rising to several hundred million.
Such an approach shouldn’t be a surprise, as the companies they are targeting are so established.
If we look at the other example, $10m is seemingly the ceiling for most venture capital-backed transactions. Due to the unpredictable nature of these deals, most just aren’t willing to part with significant money from the outset.