You may or may not be familiar with the terms Venture Capital (VC) and Private Equity (PE). Here’s a simple explanation:

Both VC and PE are within the private markets. Private means the company is not publicly traded or open to purchase by ordinary investors. For example, Apple is a publicly traded company that anyone can own. To own or invest in privately held companies, you must be a founder, capital provider, or employee. 

Venture Capital 

VC firms invest in ideas or startup companies. Think of Silicon Valley – a place with a large pool of capital to fund new ventures. In return for the initial capital, private investors receive lucrative returns. However, investors only earn returns if the company succeeds. 

Typically, venture capital is provided for innovative technology firms and other high-growth potential companies to maximize returns. The structure of VC exposes investors to more risk, providing higher returns. 

Depending on where you live can determine how and what companies are funded. On the West Coast, investors are more open to risk by investing in ideas in the hope of the company succeeding. Comparatively, the Midwest applies a more conservative approach to distributing capital. Investors may require years of steady growth and proof of concept before providing capital. 

Private Equity

PE involves investing in companies with positive or potential for positive cash flow with strategic repositioning. Often, if an investor takes a sizable stake in a privately held company, their objective is to restructure the organization to increase its performance and value. 

One major distinction is that PE involves leverage (debt). This form of equity involves debt financing – using a lender’s money to purchase and improve a company. The goal is to increase the value before selling the organization. If the efforts to improve performance fail and the company’s value decreases, the investor will lose money. Restructuring a company ranges from cutting costs, eliminating business units, improving operations, developing a new strategy, and many other factors. 

Venture capital and private equity are both common terms in the private markets.