Often, private equity and venture capital are confused because both refer to firms investing in companies and exiting by selling their investments in equity funding, such as by holding initial public offerings (IPOs).
There are significant differences in the ways both types of funding are operated, however.
Investing in private equity involves owning, or having an interest in, shares of a company that are not publicly listed or traded. Private equity is a source of investment capital from high-net-worth investors.
The goal of venture capital financing is to provide capital to startups and small companies that have the potential to grow and make above-average returns. The funding is often fueled by innovation or by creating a new area of the market.
These firms typically acquire mature, established companies which may be degenerating or not making the profits they should because of inefficiency. The firms then streamline operations to raise revenues. In contrast, venture capitalists usually invest in companies that have high growth potential.
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