Tyler Tysdal is a man who has just about seen it all in the world of business investment, throughout his career he has been both a private investor and fund manager, and he has worked as an advisor to many investment funds to help impact opportunities and guide them to make smarter investments. He is then, the perfect person to help us get into the myth that surrounds private equity and venture capital, that they are both the same thing. Whilst technically speaking you could refer to venture capital as a form of private equity, the two phrases really do mean different things, and today we are going to look at just what it is that separates the two investment vehicles.
Type of Business
One of the biggest differences between the two investment strategies is the types of business which they invest in. With venture capital they will always look to invest in startups and new businesses, whereas a private equity investment will pump its money and expertise into a company which has been around for a while already.
Whilst venture capital companies will get involved with their invest to help impact opportunities and give the young business the best chance of success, they will largely be hands off, even if they do have a large stake. In the case of private equity however there will be heavy involvement from the PE firm and they will normally look to have a seat on the board, or they will have complete control over the company.
Both investment strategies carry risk of course bit there is significantly higher risk when investing through venture capital as opposed to private equity. This is of course because the business is unproven and even if the indications look good in terms of how the business may do in the future, it is unlikely to have any concrete value at the time of investment. Private equity too carries a risk but there is much more evidence and information available about the business which will indicate whether or not it makes for a sound investment.
Private equity investment will look for a business across many industries and sectors, and will base the investment on data rather than the industry in which it operates. In the case of venture capital however there is much more of a focus on businesses which are operating in rapid growth industries such as chemicals, tech or finance. The industry needs to be hot when the investment is made so that the VC stands the best chance to make money from their investment.
These are the key differences between the two strategies, in terms of similarities, the only comparisons which we can draw is the way in which each fund goes about securing investment. Both look for wealthy individuals to invest and very often a private investor will look to split their investment between VC and PE, to diversify their portfolio and increase their chances of making profit.