Private Equity and Venture Capital: What’s the Difference?

Private Equity Defined

Private equity funding refers to the process of investing in private companies or businesses in order to acquire a significant ownership stake. Private equity firms typically raise large amounts of capital from institutional investors such as pension funds, endowments, and high net worth individuals, and then use that capital to invest in privately held companies.

The primary objective of private equity investors is to achieve a high rate of return on their investment, usually within a period of three to seven years. Private equity firms use a variety of investment strategies, including leveraged buyouts (LBOs), growth equity and distressed investing.

LBOs are a common strategy in which the private equity firm acquires a controlling stake in a company using a combination of equity and debt financing, and then works to improve the company’s operations and financial performance before eventually selling it for a profit.

Private equity funding can provide a number of benefits for both the investors and the companies they invest in. For investors, private equity can offer the potential for high returns, diversification, and access to private markets that are not available through traditional public market investments. For companies, private equity funding can provide access to capital, operational expertise, and strategic guidance that can help them grow and succeed over the long term. However, private equity investments can also be risky and complex, and require significant due diligence and expertise to execute successfully.

Are Private Equity and Venture Capital the same thing?

All venture capital is a form of private equity, but venture capital is a distinctly different form of investment.

While private equity firms focus on investing in mature, established businesses, venture capital investment firms focus on start-ups or younger companies. The venture is riskier than investing in older businesses, but the potential return is usually greater as well.

Private equity firms typically seek to purchase more than 50 percent of an older, established company. On the other hand, those investing venture capital into a younger business will usually seek only a minority ownership with certain control provisions. The firm can later profit from the investment when the startup goes public, is acquired, or by selling some shares on the secondary market.

Venture capital is often the primary form of fundraising for tech startups, which have a need for significant capital. It often carries the potential for a large return for investors.

To learn more about attracting and securing venture capital funding, contact our office for skilled guidance.

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Michael Kimball, Esq.

Mike Kimball offers practical, timely, and economical legal solutions that move projects along and allow you to focus more on your core business objectives. He has years of experience partnering with companies ranging from Silicon Valley startups to firms in aerospace, biotech, construction, and many more. Mike’s in-house experience includes Yahoo!, Krux Digital (acquired by Salesforce), and Commerce One. He has worked on transactions with Eurostar, Red Bull, Major League Baseball, NASDAQ, Goldman Sachs, Liveramp, Amazon, and NASCAR.