At first glance, private equity and venture capital funds are very similar. In both cases, stakes are acquired in private companies in order to eventually sell them at a profit. And yet, there are important differences. Below, we list the three most important ones.
1. Innovation versus efficiency
To make a very rough distinction, the difference between private equity and venture capital is the difference between a focus on innovation and a focus on efficiency. Venture capital focuses on companies developing new technologies and entering immature markets, whereas private equity aims to make existing companies operationally stronger and improve their position in existing markets.
2. Relationship with the entrepreneur
Another key point of difference is that venture capital typically provides capital to entrepreneurs to further grow their businesses while the entrepreneurs themselves stay on as the management and face of the company. Consider, for example, how venture funds supported Mark Zuckerberg in building Facebook into a global player. In private equity, the investment is often used for a buy-out of the entrepreneur: think, for example, of an entrepreneur who wants to retire or a founder who hands over his business to a company in the same sector owned by private equity as part of a buy-and-build strategy.
3. Minority/majority
Another thing to remember is that private equity usually operates with majority stakes and venture capital with minority stakes. For private equity, control over a company’s operation is very important, so PE funds prefer a majority stake. This gives them the ability to intervene when necessary. For venture capital, spreading risk is more important, so stakes in a company are often spread across several funds. This also helps with bringing in knowledge and expertise to support a startup's founders. Take, for example, a software company that provides services to the healthcare sector: when developing such a product, it helps to have an investor on board that is good at growing software companies as well as one that knows all about the healthcare market.
Venture capital is riskier due to the nature of the investments, but it also delivers higher returns when things go well. So a well-balanced investment strategy with a good mix of risks and opportunities includes investments in both types of funds. Marktlink Capital makes this possible through its fund-of-funds programmes.
