When it comes to investment there is so much confusion around the jargon, the different ways in which a fund and pool of money is managed and the vehicles by which they are used. A question which we are often asked here is the difference between venture capital and private equity, which we will seek to answer today. To help us in doing that we have Tyler Tysdal, an expert in this field and a man who has worked as a fund manager and an investor during his career. We spoke to Tyler about the key differences between these similar looking investment vehicles.
Venture capital is the investment in young companies which have a bright future. The investment fund which pumps cash into these young businesses will also look to use their experience to help impact opportunities and encourage success and growth.
Private equity is a vehicle whereby the fund invests in an already established business and seeks to improve its fortunes. Sometimes this is because the business requires additional funding, sometimes because it is flailing and needs support.
There are clear risk levels between these two investment vehicles because for venture capital there is no history to base their investment off, only the potential which the company could have. In terms of private equity however they are investing in well established businesses which have a track record of success in there particular market.
Venture capitalists will look to take over a large stake in the company and will be involved in a lot of the decision making and the ideas which the company has. In terms of private equity however there will be less involvement and whilst they may place one of their investors on the board, they won’t have much to do with the day to day running of the company.
Any investment vehicle is of course designed to bring about returns, and this is another key difference between these two vehicles. In the case of venture capital the investment fund will of course look for large returns based on the high risk which it will have taken on the business. This is why we often see venture capitalists invest and take a 49% stake in the company that they are pumping money into, because they want to give their investors a healthy return in the future. For private equity however this is more of a cautious approach and thus smaller returns are expected.
Finally we look at the industries into which each of these vehicles invests. In the case of venture capitalism, as you can imagine, they are looking for fast growing and exciting industries such as chemicals, energy and tech. In the case of private equity however there is no limit to which industries will be invested into, as the decision is based on track record and current climate rather than the industry on the whole.