Private Equity or Venture Capital? Which One to Opt For?
Choosing between VC and PE is difficult indeed. Well, we tried to ease it a little!
Startup funding is often a topic of interest. But more often than not, there are different options that seem to overlap. For instance, Private Equity and Venture Capital.
While the two might sound similar, yet there are a lot of differences between the two. Let’s have a peek at them, and also a better understanding of how startups can benefit out of it.
Venture Capital (VC)
Venture Capital is a type of financing that is invested in startups and small businesses that have a potential for exponential growth.
The goal of a VC firm is a very high return for the venture capital firm. This usually happens in the form of an acquisition of a startup or IPO.
A VC firm is usually run by a handful of partners who raised a large sum of money from a group of Limited Partners (LP), to invest on their behalf. The partners have a window of 7-10 years, which usually generates a big return.
Private Equity (PE)
Private Equity is a type of investment that is typically reserved for companies that have already grown to a bigger size. These kind of companies normally are looking for a part growth or exit strategy, that is not available through traditional financing. Private equity firms usually acquire 100 percent of a business they are funding.
Venture Capital firms usually tend to go for early stage, higher risk companies. This is when a company grows from nothing to everything, but super fast.
Private Equity, on the other hand is interested in companies, that are already established. But, they need more capital to thrive.
Private Equity firms usually purchase a majority share of the company, if not 100 percent. This also involves acquiring them. Venture Capital, on the other hand, opts for a portion of the company, usually splitting the startup pie with other VCs, angels, founders, and any other investors that have taken on equity investment in the startup’s lifetime.
Which one Should Startups Opt for?
At the most basic level, VCs are about taking big risks, and big rewards. On the other hand, Private Equity firms are about low risks and big rewards. The difference lies in their willingness to take risks.
VCs are all about disruption, while PE firms are more focussed on taking business forward traditionally.
Thus, when asked about choosing one over the other, we would say it Venture Capital is more legit.