Private equity and venture capital are intrinsically linked, especially in certain situations. Private equity is money that is poured in by owners or investors into a private company. This money is not publicly quoted or part of the company's stock exchange profile. It is not money that shareholders or bondholders are entitled to. Private equity exists for the sole purpose of investing in a company either to ensure that it does not go bankrupt, or to create progress and move a company on to the next level. The most interesting kind of private equity investment occurs through venture capital.
Venture capital is private equity that is specifically provided to companies that have huge potential but are at the very early stages of their development. Over the past ten to fifteen years, most venture capital has gone towards technology start ups. Most of these companies are run by a few people who have a couple of potentially brilliant ideas. Most of these ideas cannot be made into something concrete without a lot of money. So a venture capitalist will usually speak to these "innovators" and come up with a strategy to move their company forward.
Most of the time, venture capital results in the investor becoming a part owner of the business. This ownership can be anything from 10% to 90%. The people responsible for the idea or start up company usually retain some sort of control as well. How much depends on the agreement between the two parties.
The great thing about private equity that is given in the form of venture capital is that it can really make the difference for a start up company. These companies do not have enough know how or resources to raise money in the way a larger company would. They cannot sell shares on the NYSE or even secure a bank loan large enough to cover their expenses.
According to recent data, venture capital is responsible for around 2% of the United States GDP over the past few years. It is intrinsically linked to job creation and will always be a major part of getting new ideas and innovations to the market.
To sum up, all venture capital is private equity but not all private equity is venture capital. The form of private equity that goes towards new ventures will always be a major portion of how business works in the United States.
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Similarities in compensation structure for hedge funds, venture capital firms, and private equity investors
