private equity vs. venture capital

Private Equity vs. Venture Capital: Explaining the Difference

VWB Blog 1 year ago 5

Did you know that venture capital firms raised close to $130 billion in the United States of America in 2021? Starting your own business or kicking off as an entrepreneur is close to impossible without some level of funding. Two of the most popular options that you can use to finance your business are private equity and venture capital.

Understanding the differences when it comes to private equity vs. venture capital is important because it will set the foundation for your business and its growth. The good news is that you’re in the perfect spot to learn all about the reasons to consider going with a VC firm or a private equity firm for your business needs.

Keep reading this article to learn more today!

What Is Private Equity?

Private equity investment occurs when companies or individuals with large amounts of money decide to invest in shares of your company. These shares aren’t available to the general public. The general rule of thumb when it comes to private equity is that the firm will take over a business that is publicly traded and then delist it from the stock markets.

Private equity has gained a ton of traction as a way to get the funding necessary to start your own business. The private equity industry raised almost $400 billion in 2021 alone.

The common method for private equity firms is to buy small businesses that are going through a stressful period and that have poor management. From there, private equity firms will change the structure of the business and put new management in place to get better results.

Pros of Private Equity

One of the biggest reasons to consider going with private equity is the growth potential that your business will have with the help of PE firms. The massive financial resources that these firms have will make a huge difference in altering the trajectory of your business.

This influx of resources will make it easier for your company to get an exciting new idea into production. You could even buy out one of your rivals.

You’ll also get more guidance when it comes to the directions that you should take your business. Most private equity firms are looking to purchase a business and then provide the resources to continue growing to the original owner while they act as a mentor to you.

A big reason why many firms love taking the private equity route is the returns that it generates. It is one of the safest investments that you can make.

Cons of Private Equity

The biggest downside to private equity is the barrier to entry. It takes some serious financial muscle to get into the private equity game, with smaller investors putting up $250,000 and larger ones stretching into the tens of millions of dollars.

The sad truth when it comes to private equity investments is that most typical people will never have the means to get started. Don’t expect the same level of inclusion with private equity as you’d get with the public market.

It also comes with some significant risks to your overall financial portfolio. You need to speculate and ensure that you’ve found a great investment before putting your money up. All it takes is a failed product launch to set the new investment back.

What Is Venture Capital?

Venture capital looks a lot like the television series Shark Tank. It entails wealthy individuals putting up the money to finance startup companies and small businesses in exchange for a percentage of ownership in that company.

It’s quite common for a few venture capitalists to add their money together as a way to invest in these small businesses that have the potential for big returns. The goal is to find startups that offer goods or services that have the potential to take off and achieve massive levels of success.

These VC firms will then use that money that is pooled together to purchase an equity stake in the company that they want. That money then goes toward the things that will allow the startup to grow and flourish.

Pros of Venture Capital

The biggest pro of going with venture capital vs. private equity is the fact that you can raise massive amounts of money. Most small business loans are capped at $5 million, and it’s difficult to qualify for the largest loan. Choosing venture capital will open doors that allow you to receive up to $25 million in financing.

Another big benefit of going with venture capital rather than other forms of financing is the fact that you don’t have to worry about monthly payments. You’ll have more capital available to invest back into your business rather than having to budget.

You can also benefit from venture capital since it doesn’t require you to put up any of your assets. If you’re worried about losing your personal possessions then it’s best to work with VC firms.

Cons of Venture Capital

The downside of working with a venture capitalist is the fact that you’re losing a percentage of your ownership in your company. Odds are that you’ll need to dilute shares of your company multiple times, which will result in a smaller percentage of ownership.

You also run the risk of getting distracted from running your business while trying to secure funding from a venture capitalist. The process of getting the funding that your business needs could take months. You need to make sure that you can manage your business while working to get the funding that you need.

Now You Know the Difference Between Private Equity vs. Venture Capital

Having a good idea of the differences when it comes to private equity vs. venture capital is essential if your goal is to form a startup and secure more financing. Private equity is a great option if you’re looking for a massive influx of capital from a private equity firm. VC firms are the best option if you’re willing to sell a stake in your company to get more funding.

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