Venture Capital Vs Private Equity

Venture Capital Vs Private Equity

Venture Capital:

For a small business which is trying to enter into the new market, and which requires substantial capital to finance its business, they try to generate funds in the form of Venture Capital. High net worth individuals (HNI) provides the venture capital funds to these start-up companies. These HNI investors are also known as the angel investors who have massive wealth which they generate through various sources. Mostly, these HNI investors are entrepreneurs or executives who have retired from the big business empire they have built.

Based on the development of the business plan and scope of growth of the business, these angel investors  offer seed capital to ventures in the similar industries or the businesses with which they are well aware.

Steps for Venture capital process:

  • The first step in the venture capital process involves the submission of the business plan to a venture capital firm or an angel investor.
  • Based on the interest level of the business plan, these venture capital firms or the angel investors perform a thorough investigation of the business model of the company, its products, management and the operating history.
  • Once the investigation gets completed, these investors are ready to make an investment into the business in exchange for equity in the company. They generally provide funds in installments.
  • After a period of 4 to 6 years, these investors exit the company in case of IPO’s or merger and acquisition.

Features of Venture Capital firms or investors

  • They generally focus on the industries such as software, technology and biotechnology.
  • The work on high risk as they invest in the early stages of business. Hence, it makes a low investment.
  • They expect sales from the business instead of the profit.
  • They aim that business increases its market share.
  • They make an exit through another investor.
  • They focus on fast-growing companies.

Private Equity:

Private Equity is a capital support provided by institutional investors and accredited investors to established companies for an extended period. Private equity can be further simplified as the equity which represents the ownership in an entity which is not publicly listed. The shares of these unlisted companies are purchased by the high net worth individuals against which they provide investment capital to the firm. These firms also receive investment capital through investment banks, endowments, pension funds, insurance companies, various financial institutions.

How Private Equity works?

The process of fund-raising through private equity is done by circulating prospectus to the potential investors. The fund raised through private equity is used for investing in business expansion.

Based on the scope of the business expansion, business plan review, meeting entrepreneurs and company managers, these private equity firms decide whether to invest in the companies or not. They perform a thorough evaluation of the investment candidates.

Features:

  • Private equity investors invest in the firm only if they see that the business is making a profit.
  • Before making any investment, they will evaluate if the business turnover has grown at a CAGR for five years or not.
  • They will see the stability of the business belonging to any sector or portfolio.
  • They are aggressive in investing in the business.
  • They focus on the bottom line of the P&L, i.e. profit and the profit share.
  • They work on low risk.
  • They make an Exit after IPO.

Disclaimer

This website is a service of Kalkine Media Pty. Ltd. A.C.N. 629 651 672. The website has been prepared for informational purposes only and is not intended to be used as a complete source of information on any particular company. Kalkine Media does not in any way endorse or recommend individuals, products or services that may be discussed on this site. Our publications are NOT a solicitation or recommendation to buy, sell or hold. We are neither licensed nor qualified to provide investment advice.