Question

DigitalWave startups had a maximum pie of the private equity and venture capital (PE/VC) funding last year. Discuss how arranging venture capital from the venture capitalist differs from Equity financing.

Plz answer in more than 500 words if possible.

Answer 1

Both the Venture Capitalist and the equity Financer is responsible for providing fund to the company at various stages. But both are often considered as similar and these are used interchangeably because of the fact that both the type of firm made investment in the companies by purchasing the equity share of the company and exit the company by selling the equity share, thus both are almost similar but there are some fundamental difference in both the type of investment firm.

Private equity are the investment vehicle which generally investment in the private company at on the maturity stage of the company. Whereas in case of venture capitalist the investment is made in new companies or in the startup. These startup is not able to raise money from the public or is not able to take loan thus they go to venture capitalist for the purpose of funding.

The major difference between the same is as under:

1. In Private equity investment is made at mature companies that are phased in a well manner. The investment may be made because of the fact that the health of the company may be not so good or it needed some financial support for the purpose of bringing some operational efficiency or for the purpose of expansion. However, in case of venture capitalist the investment is made in a newly established company or of the companies which are startup to provide for the purpose of expansion or holding the existing market.

2. Generally private equity made investment only in few companies whereas in venture capitalist the investment is made in multiple companies.

3. In private equity the investment is generally made is matured industry whereas in venture capitalist the investment is made in high growth industries

4. Risk taken by venture capitalist is much higher as compared to private equity.

5. In case of private equity the money is generally taken for the purpose of expansion but in venture capitalist the money is taken for the purpose of streamlining the operation.

6. In private equity generally the company buy the other company fully i.e. 100%. This is because of the reason that the company want to have a complete control over the other company to drive the decision of the company in which the investment is made. However, the same is not true in case of venture capitalist as in venture capitalist the investment is made only upto 49% so that it can have more fund to investment in other companies.

7. Further, there is one more significant difference is private equity firm may invest in debt or equity both but the venture capitalist generally invest only in the equity mode.

8. Private equity companies generally invest in the established industries whereas in case of venture capitalist the investment is made in the tech related company such as E-Comm companies.

9. If we talk about return then the return generated by the venture capitalist is much higher as compared to the return generated by the private equity firm.

Hope are the points are self explanatory.

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