Most of us think of private equity (PE) and venture capital (VC) as the same, but in reality, they are not. SME promoters who need capital to grow their business need to know the differences between PE and VC funding to choose the right funding option.
While it’s true that with both PE and VC, investors provide companies with the equity capital they need and receive a stake in the company in return. However, they differ from each other in many ways, such as the type of companies they invest in, size of PE and VC's investment amount, the required ownership percentage they demand, and much more.
7 Key differences between Private Equity and Venture Capital Funding?
Let’s discuss some critical differences between venture capital funding and private equity investment in detail;
1. PE Firms Invest larger capital than VCs
Both PE and VC firms invest growth capital in companies, but the amount they invest differs significantly.
Since private equity firms invest in larger companies, the deal size or investment amount of PE is much larger than that of VCs. PE firms invest larger sums of money i.e., hundreds of millions.
VCs, on the other hand, provide capital to companies in various rounds. They provide seed capital, early growth capital in Series A and later growth capital in Series B, C, and beyond.
2. Venture Capitalists Focuses on Industry Niche
Private equity investors tend to invest in companies across industries from healthcare to construction, energy, transportation, etc. However, venture capitalists focus on tech companies that can be the next big disruptor in the industry. VC portfolio spans across industries such as technology, biotech, and life science companies.
VC funding is mainly offered to tech startups because they have a strong potential to grow faster, which makes it an attractive investment opportunity for VCs to generate high returns.
3. Private Equity Investors seek a majority interest in the company
Funding through PE and VC makes a big difference in the degree of control diluted.
PE firms provide huge capital to buy a majority stake in the company. Thus, PE is the best financing option for owners ready to give up significant control of their business.
However, venture capitalists demand a minority stake in the company so, the majority of the stake is still in the hands of promoters.
4. At what stage, your business is operating now?
PE investors look for mature businesses. Thus, companies that are well-established and have a proven track record can seek funding from private equity investors.
However, VC funding is a viable funding option for emerging startups and early-stage small businesses. These businesses do not have a great track record or proven model but the growth potential is very high. And, the money provided by VCs can generate very high returns.
So, if you are a new startup or a small business owner, you can consider seeking funds from venture capitalists.
5. Venture Capitalists take high risks on investment
As PE firms provide funds to already established companies the risk is comparatively less than VC funding.
Private equity investors after doing thorough research invest in companies which are having a good market presence and need more capital to grow. Such companies have already experienced different life cycles or witnessed market ups and downs so the risk of failure is very low.
However, VCs finance startups and small businesses so the risk of their investment is high. But despite the high risk associated as the growth potential also looks high VCs give capital and acquire minority stakes to make very high returns on their investment.
6. Private Equity Firms have strong Leadership and Management Capabilities
As PE investors have significant control, they participate in business leadership and management. VC funding does not come with a charge over business leadership and management. Venture capitalists offer operational assistance and hands-on support to SME promoters but companies are not bound to follow the same.
7. Private Equity investors expect quicker payout than VCs
PE seeks a quicker turnaround which usually ranges between 3-5 years. They want to make quick returns and then exit. However, VCs invest in small businesses, they stay invested in the company for the long term and exit at high returns.
Private Equity Vs Venture Capital: Which is the Best Funding Solution for you?
SME Promoters before seeking funding from PE or VC, you must ask yourself a few questions to select the best fundraising option. Here is a checklist;
- How much capital do you need and why is it required?
- What is the current stage of your business; is it already well-established or in the early growth stage?
- Which industry do you belong to or is your product a big disruptor?
- Are you comfortable giving up significant control of your business?
- Is your business ready to scale fast?
If your business is at an early stage, Venture capital funding can be the right option. Companies that already received funding from VCs can even acquire additional capital from VCs in different rounds. While mature medium or larger-scale businesses where promoters are ready to dilute significant control can approach private equity investors.
