Today we have financial expert Tyler Tysdal talking with us about all things investment and first up we are going to focus on a key misconception which is made between venture capital and private equity. The confusion is easy to understand given the glaring similarities between these two investment vehicles and whilst both do consist of a fund of pooled resources, the way in which they are handled are very different indeed. Tyler has been both a fund manager and an investor in both of these investment vehicles, which is why he has helped us to clear up the key differences between these approaches.
Types of Investment
Arguably the biggest difference between these two forms of investment are the companies into which each invests in. A venture capital investment is made into new small businesses and start-ups, whereas with a private equity investment this is elusively for private companies who are well established. ins some cases we see public companies get investment from private equity but one this does happen the goal is ultimately to take that company private.
One of the key responsibilities of any investment fund is to assess the risks of each investment and this is another area in which private equity and venture capital are different. The safest strategy between the two and the one which carries the least risk is private equity, these funds invest into long standing businesses and their track record and levels of success can be easily monitored ahead of investment. Venture capital is certainly the riskiest strategy as their is no telling what kind of success this new venture may have. It is for this reason why many investors into start-ups offer both money and experience in order to help the young company establish itself in their industry.
The aims of both types of investments are very different and in the case of private equity we see that investments in these well-established business is done with an eye on seeking out growth and expansion of the business which will bring in higher levels of profit. In the case of venture capital however, the aim is to impact opportunities and work with the young business to scale up its operations and help it to become established.
Generally with private equity we see investment funds look for a 100% takeover of the business whereas with venture capital it very rarely exceeds 49%. The reason for this is a combination of the risk which is involved in investing in a young business, as well as the tenancy for entrepreneurs to wish to keep the majority share of their company.
Private equity groups will invest in just about any industry and there is very rarely any which is off limits. In the case of venture capital however this is usually exclusively for industries which require large scale investment such as energy, high technology and the chemical industries.