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VC and PE – A Comparison
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Earlier, in one of our blogs, we have discussed about Venture Capitalists (VC). Let us look further and understand the difference between VC and Private Equity (PE).

There are several common characteristics between the two. Both are independent sources of capital and, managed by fund investment teams/managers whose objective is to maximise wealth of the investors. These teams generally comprise of individuals who share a common investment philosophy and style. They are either large institutions like pension funds or HNIs who are willing to take high risk.

There are several differences, however.

 

Private Equity

Venture Capital

Focus

Focus is on buying companies across all industries/sectors.

Focus is on technology centric companies.

Majority/Minority stake

PE firms generally buy 100% of a company in a leveraged buyout.

VCs only acquire a minority stakes; lesser than 50%.

Investment size

Investments are generally huge; ranging from Rs 10 Crores to even Rs 1,000 Crores.

Smaller investments are involved; usually below Rs 10 Crores for companies that are in early stages of set-up.

Capital Structure

A combination of debt and equity may be used.

Equity/cash is generally preferred.

Stage of financing

PE firms usually buy mature companies (later stage financing) that have a track record.

VCs are usually involved in early-stage financing and hence, the risk involved is even higher.

 

PE investors, in contrast to VC funds, mostly invest in mature industries and in later stage opportunities. They invest in companies which have a substantial operating history, or the ones having sizeable cash flows. For example, they may help revive the company’s operations under a new management team (also called management buy-outs/ MBOs).

Unlike VC, PE investments never involve products or technologies that are untried or new. VCs, on the other hand, bring to the table most of the technological innovations in the areas of computers and communication, healthcare, etc.

The extent and nature of risks in PE investments are different from those in the case of VC. PE investors prefer to limit their risk to product-market risk rather than project implementation, start-up, or technology risks. Thus, the risk involved in PE is relatively lower than Venture Capital Investment.

The PE investor also focuses on broader aspects of corporate governance of the firm whereas, VC investors, especially those that invest in early stages, often spend more time on ensuring that the investee has a high quality top management team and has adequate internal systems which can produce information for monitoring / control purposes.

Last but not the least; VC fund managers typically have more operational experience as entrepreneurs or managers and, rely on their experience in evaluating prospective companies for investment. PE investment managers largely have a background in financial markets, which they draw upon to value companies, and to time their entry and exit from investments.

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