Private Equity And Venture Capital: What Are The Differences?

Both modalities have the function of raising the money needed to finance the growth of a business , but each has specific characteristics and purposes.

Although the terms have gained considerable popularity in the financial world, it is very common for doubts to arise, especially those involving differences, advantages and disadvantages and the purpose of each of these alternatives.

Therefore, it is very important to have this clearly in mind when making a future choice, which will depend on factors such as market circumstances, as well as the stage of business development.

To help with these clarifications, We have prepared a complete guide covering the main characteristics of these investment models that move the market.

After reading this, you will find it easier to identify the opportunities and scenarios that are most favorable to your company. Let’s go!

What is Venture Capital?

Venture Capital is an investment in which resources are invested in small or medium-sized companies that are expanding. Typically, in startups.

It is very common for Venture Capital to be invested in startups that are still in the ideation phase. The resources offered by the investment become essential for the company to take shape and begin its activities.

One of the differences between Private Equity and Venture Capital is precisely the fact that, in Venture Capital, there is an expectation of great growth and rapid returns .

As it carries the idea of ​​being a bet, Venture Capital is considered a high-risk investment.

A very common situation that describes this type of investment is when someone is trying to sell an idea to an investor, in order to convince him to invest in the company.

The injection of resources occurs through the acquisition of shares or participation rights, which leads to another characteristic of Venture Capital: here, the investor becomes the owner of a part of the company.

What is Private Equity?

Private Equity is an investment fund invested directly in companies. This type of investment occurs in companies that are not publicly traded, as the objective of this investment is precisely to prepare companies to go public .

One of the main characteristics of this modality is that the companies that receive this investment are already consolidated in the market . In other words, they are already at an advanced and mature stage of development.

Typically, the criteria that determine this segmentation are based on revenue, growth capacity and potential existing risks.

Another notable characteristic is that Private Equity often has the purpose of opening up the company’s capital on the Stock Exchange , through an initial public offering of shares ( IPO ).

In exchange for the contribution, investors guarantee a stake in the share capital of these companies.

Generally, Private Equity is a single operation, with the movement of a significant amount invested by a single or few investors.

It is also carried out when the company receiving the contribution already has profitable margins and stable cash flow , as well as the structure and capacity to sustain a significant debt.

Advantages of a Venture Capital investment

Among the main advantages of Venture Capital, the speed of the negotiation process stands out , especially when compared to Private Equity.

The processes are less bureaucratic and more practical. Since the objective is to speed up the process of injecting resources, it is common for the lead investor to be responsible for analyzing the contractual clauses.

This is different from Private Equity, where all investors need to review all the documentation, which ends up prolonging the process.

Other advantages of Venture Capital are:

• Higher return than traditional investments;
• Higher return than Private Equity (thanks to its high risk);
• Greater investor engagement with the brand;
• Management support;
• Long-term vision;
• High growth.

In relation to the risks offered, there is a reduction in autonomy, since decision-making must also be validated by the investor who owns part of the company, and this can generate conflicts when there is disagreement between the parties.

Furthermore, the expectation of a quick and solid return can create a recurring demand for results. In this case, it is necessary to always ensure visibility of the business scenario and its vision for the future.

Advantages of a Private Equity investment

Private equity investment brings opportunities and also some risks. Depending on the company, each characteristic must be evaluated according to short, medium and long-term interests.

Among the advantages, we can mention that it helps in business management , as it has the guidance of a group of experts. It is also an investment that tends to increase the company’s profitability. In addition, it contributes to:

• Increased company reputation in the market;
• More features;
• Increased competitiveness;
• Opening to new markets;
• Opportunity to enter the Stock Exchange.

There is also difficulty in liquidating Private Equity holdings, as there is no ready order book. The company needs to find a potential buyer for the sale to be carried out.

Furthermore, as it is considered a high-risk investment, the company’s performance after receiving the funds will be decisive for the results.

However, by having good criteria for selecting companies to be considered, risks of this type are minimized and even foreseen.

Which modality is better? Venture Capital or Private Equity?

Given all this information, you can see that Private Equity and Venture Capital are different types of investment that have advantages and particularities, right?

The question remains: “Which one makes the most sense for my business at the moment?”

Venture capital is generally aimed at startups and early-stage companies with high growth potential but also high risk. VC investors look for disruptive companies that can deliver significant returns despite the risk of failure.

On the other hand, Private Equity is generally geared towards established companies that have demonstrated consistent profitability. PE investors typically look for companies with potential for operational improvement, where they can add value before selling the company at a profit.

Both have their pros and cons. Venture Capital can offer the chance for explosive growth, but it comes with significant risk. Private Equity can offer the chance to improve an already profitable company, but it doesn’t offer the same potential for rapid growth as VC.

Don’t forget that it’s also important to open the discussion to the finance team, gather opinions, research and talk to experts. This helps to make more informed decisions.

Investment Cycle: From Angel Phase to Private Equity

Investment rounds are a strategy commonly employed by startups and other companies to raise funds. These rounds are divided into series, each corresponding to a specific stage of maturity of the company seeking investment.

Angel or Pre-Seed Investment

This is the first round of investment that most startups receive. The main focus is on building the initial team and developing the Minimum Viable Product (MVP). According to data from Dow, in our city, the value of an Angel Investment is usually around R$700 thousand per round.

Seed Investment

At this stage, the startup already has MVP validation indicators and seeks to expand the adoption of its products and services in the market. During the Seed round, the startup can receive a capital injection ranging from R$700,000 to R$2 million.

Series A, B, C and beyond:

• Series A: At this stage, the startup, now at a more advanced stage, can receive investments ranging from R$2 million to R$20 million. The goal is to improve and monetize the user base, create new products or explore new markets.
• Series B: With the company more structured, the lead investor is usually introduced, in addition to co-investors, seeking to further expand the company’s activities. Teams are strengthened and the company begins to plan for the long term.
• Series C, D, E, F and G: In these phases, the company has fewer risks and faster growth. The objective of these investment rounds is to expand and structure the company more and more, including on an international level. Investments tend to start in the tens of millions.

Private Equity: This type of investment is aimed at already consolidated and mature companies that envisage a public offering (IPO) in the medium term. Investments in this phase exceed R$200 million.

Each investment phase has a specific objective that helps the company achieve its growth and expansion goals. It is important for startups and companies to understand each stage to maximize opportunities and ensure sustainable growth.