When businesses need funding to expand their operations, they typically have several available options. Business owners can fund new operations out of their own pockets, which can limit the expansions of the businesses, or business owners can find investors for their businesses. Private equity and venture capitalism are two ways for business owners to find investors for their businesses.
Understanding Private Equity
Private equity is a type of funding where capital is provided to a company by private investors in exchange for shares of that company. Many companies that receive private equity are not listed publicly. However, some companies that are listed on stock exchanges have many of their shares purchased by investment groups so that the companies can be unlisted from the stock exchanges and taken private.
Understanding Venture Capitalism
Venture capitalism is a type of funding where capital is provided directly to companies from investors. Known as Venture Capitalists, these investors invest in revolutionary and innovative companies in their industries. Investments through venture capitalism are not always monetary, however. Sometimes the investors provide knowledge and other resources to companies.
There are several ways in which private equity and venture capitalism differ from one another. Aside from their investment methods, private equity investors and venture capitalists look for different things in companies that they invest in. Private equity investors typically seek to purchase older companies that have been established, while venture capitalists mainly invest in newer startup companies. Most venture capitalists also only invest in technology startups, whereas private equity investors search for investment opportunities across a range of sectors.
Private equity firms and investors invest much more capital into companies than venture capitalists. Venture capitalists tend to provide small amounts of funding to companies for small stakes in these companies, whereas private equity investors seek to own at least 50% of the companies that they invest in. Private equity investors are able to take on the larger risks because they typically invest as large firms rather than in smaller groups of investors.