Oftentimes, the terms venture capital (VC) and private equity (PE) are used interchangeably. However, these two types of equity holders are not synonymous.
Private equity is exactly what the phrase describes—funds created by private lenders that are not open to the public. However, what many people think of when they describe PE or VC, are the firms that do the actual investing. Venture capital is technically a subcategory of private equity, and separately they perform different functions.
Both venture capitalists and private equity groups (PEGs) focus on the buying and selling of businesses to increase investment capital, and both are funded by wealthy businesspeople, oftentimes those who have previously worked in the banking industry. However, this is basically as far as the similarities extend.
PEGs typically seek out companies that are already established. They utilize investment capital to restructure and increase revenue streams in order to then sell the company at a higher price than the amount of money that was originally invested. PEGs use leveraged buyouts (LBOs) and growth capital to increase the return on funds.
On the other hand, VC funds are in the riskier business of pursuing startup ventures and investing capital in exchange for equity with the expectation that the company will go big. VC searches for intelligent and driven people that have not yet materialized adequate funds to pursue their grand ideas, while PEGs are much more monetarily driven. Venture capitalism tends to hold a much higher failure rate, but the few businesses that do become wildly successful make up for money lost in failed ventures.
In summation, private equity groups invest capital in mature companies through means of mezzanine and growth capital lending, while venture capital is utilized to grow small start-ups with the intention of assisting them in becoming highly valued companies. Private equity is the overarching industry that turns investments into higher monetary rewards.
Now that these two terms have been demystified, one may go on to pursue the appropriate private equity sector. If you are a business owner interested in working with a private equity group, please contact George & Company. We would be more than happy to assist you in finding the right investor for your business.