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Investing in either private equity or venture capital has similarities, and some industry experts even consider both private equity and venture capital to be part of the same asset class, or category of investing. Others separate each into its own category but consider them both to fall under the alternative investment umbrella, which represents a class of investing that is less traditional then stocks and bonds but carries with it the possibility of greater returns or profits. For all their similarities, such as the fact that at the core both generate profits by acquiring a stake in another business, there are still decisive differences that make the nomenclatures of private equity and venture capital unique. The biggest difference between private equity and venture capital is that private equity generally is invested in a proven company, and venture capital typically is invested in a much newer company that is still early in its development.
Private equity and venture capital both represent sectors that invest in businesses in transactions that are not open to the general public. Private equity firms will either acquire a stake in a business or buy the company outright, and venture capital provides investment capital in the young stages of a company's development in an attempt to capitalize on the anticipated growth of that business. Eventually, private equity and venture capital earn profits through either the eventual sale of that company or when that business is launched into the stock market through an initial public offering, which allows other investors can obtain a stake in the company as well.
Historically, venture capital will be invested in early stage or start-up companies that present a significant amount of risk because there is no real proven history of performance, profits or revenues, but these bets also carry with them the potential promise for generous rewards. Receiving venture capital funding can be the difference between success and failure for a start-up, because companies in the early stages of development and in the private market do not yet have access to the public capital markets where they can raise large amounts of equity or debt in an offering. After the venture capital team has obtained a stake in a business, it will have a say in some of the managerial decisions and direction of that business.
Private equity, on the other hand, traditionally will purchase a stake in a company that has a proven track record. This business might be in jeopardy for one reason or another, and the private equity investment team might become involved with the day-to-day operations of that entity. As a result, the talent pool in private equity tends to be specialized to a particular industry, such as energy, retail or restaurants. Private equity firms create what is known as a portfolio of investments and typically hold onto that stake for a period of five to seven years.