Not sure about the difference between venture capital and private equity? You're not alone. In an article published today on the Forbes website, venture capitalist/entrepreneur Victor W. Hwang shares his spin on the subject.
"This confusion is not solely the fault of journalists or the Obama or Romney campaigns. Venture capital and private equity often overlap in practice, so the distinction is frequently confusing to practitioners, too."
The goals for both private equity investors and venture capitalists are the same -- to make money through some event such as the company's sale or an IPO. Hwang describes the fundamental difference as the "tension between two mindsets," rather than two types of capital.
"These two mindsets reflect fundamentally polar methods of value generation: bottom-up creation versus top-down optimization," he says.
Venture capital is a subset of private equity, one of a number of strategies for investing in the equity of a private company. It is an attractive way of raising money for early stage start-ups that have a lot of potential for both profit and risk, and are not able to raise capital through bank loans, public offerings, etc. In exchange for the risk, the venture capitalist gets significant ownership and control in making company decisions.
In his article, "Private Equity vs. Venture Capital," author Brian DeChesare offers a few more observations about the differences between the two:
* Private equity firms buy companies across all industries while venture capital firms are focused on technology, biotech and clean tech;
* Private equity firms almost always buy 100 percent of a company in a leveraged buy-out, whereas venture capital firms only acquire a minority stake -- less than 50 percent.
* Private equity firms make large investments - at least $100 million up into the tens of billions for large companies. Venture capital investments are much smaller -- often below $10 million for early-stage companies; and
* Venture capital firms use only equity (cash rather than debt) whereas private equity firms use a combination of equity and debt.
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