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Venture capital and private equity are popular among professionals working in fields such as tax advisors, lawyers, and accountants. They offer them the opportunity to diversify their portfolios beyond traditional investments, such as stocks. Although private equity and venture capital funds may seem very similar at first glance, there are important differences between them. Below, the three main differences are explained.
Innovation versus efficiëntie
If we were to put it very broadly, the difference between private equity and venture capital is the difference between a focus on innovation and a focus on efficiency. Venture capital targets companies developing new technology and entering immature markets, while private equity aims to make existing companies operationally stronger and better positioned in existing markets.
Entrepreneurial relationship
Another important point of difference is that venture capital typically provides capital to entrepreneurs to help grow their business while the entrepreneurs themselves remain as management and the face of the company. Think, for example, of how venture funds supported Mark Zuckerberg in expanding Facebook into a global player. In private equity, the investment is often used to buy out the entrepreneur. Consider, for instance, an entrepreneur who wants to retire or a founder who transfers their business to a company in the same sector under the control of private equity as part of a buy & build strategy.
Minority/majority
It is also good to know that Private Equity typically works with majority stakes, while venture capital deals with minority stakes. For private equity, having control over operations is crucial, so PE funds prefer to hold a majority of the shares. This gives them the ability to intervene when necessary. In venture capital, risk diversification is more important, so interests in a company are often spread across multiple funds. This also helps bring in expertise and skills to support the founders of a startup. Take, for example, a software company providing services to the healthcare sector: if you are developing something like this, it helps to have an investor on board who is skilled in nurturing software companies and one who knows everything about the healthcare market.
Venture capital is riskier by the nature of the investments, but it also yields higher returns when successful. A balanced investment strategy with a good mix of risks and opportunities therefore includes investments in both types of funds. Marktlink Capital makes this possible through the fund-of-fund programs.
