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Venture Capital is a sub-segment of the private capital market. It is a form of financing that is provided to startups and early stage emerging companies that have little or no operating history but which show potential for significant growth.
Venture capital firms invest in early-stage businesses in exchange for an ownership stake. In turn, these businesses get access to the VC’s network of partners and experts as well as assistance in future fund raising.
Typically, startups face years of uncertainty and have high rates of failure. So, venture capitalists take on the risk of financing several start-ups in the hope that some of the companies they support will become successful and grow exponentially.
Private Equity vs Venture Capital
The two terms are often confused for each other. While they are somewhat related, both industries operate in distinctly different ways.
Private equity broadly refers to investment and control in a company that is not publicly listed or traded—hence the term ‘private’. Typically, private equity firms buy-out or purchase majority stakes in companies, effectively gaining control over the business and its decision-making.
“In private equity, one or a group of investors will buy into a business, perhaps alongside the founder or management team, help them improve or grow the business, then exit. There isn’t a series of investors coming in over time,” says Jaron Yuen, head of MA Growth Ventures, the venture capital arm of the MA Financial Group.
Private equity also tends to address a broader range of businesses including more mature companies, he added.
On the other hand, venture capital is actually a subset of Private Equity. It involves specifically investing in startups and early-stage companies using funds from private investors, including private equity firms.
Angel Investors vs Venture Capital
Venture capitalists (VC) and angel investors both invest in start-ups. However, the key difference between the two is that angel investors are typically high net-worth individuals (HNI) who invest their own money in start-up businesses in which they have an interest.
On the other hand, venture capitalists tend to be funds or investment companies that have pooled together money from their investors, which are then invested in promising start-ups. VCs generally specialise in a particular industry or segment of business.
Another difference is that angel investors tend to finance early-stage companies, while VCs invest in both early-stage as well as later-stage high-growth businesses.
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