The use of the words Venture Capital and Private Equity are usually used together, however there is only one category of private equity, and that is venture capital. Private Equity has different risks. For example, some businesses will go through growth changes over time and this typically requires capital in several different amounts. This capital also comes from multiple sources. Each stage during the growth of a company is considered as a “continuing risk”. If your business is young and barely generating cash flow, then it becomes a high risk to finance. Typically, a business in this situation would be forced to raise capital from family, friends, or angel investors. Once the business starts generating revenue, the risk becomes much lower.

Venture capital is typically for established products or services looking to go to market. Various investors are always looking for the newest and best product that consumers will love. Some of the major computer companies have used venture capital to finance their operations. This type of funding is considered a private partnership. Venture capitalists will provide the necessary equity financing in exchange for a stake. Typically, they will play a day-to-day role in guiding investment to take off in a few years. Most risky investments don’t go very far, but for the ones that do, they can generate a great return by making your overall investment recover and then some.

There are other private equity options like LBOs and Mezzanines. These are often used once the company has grown a bit and is a bit more secure. They may require some debt and equity, however the overall risk is much lower with a low failure rate.

LBO stands for Leveraged Bayouts. They are one of the most common loans used for private equity. A company obtains a loan from a private equity firm that is then secured with cash or company assets. Sometimes the LBO is sold in multiple parts and any cash that is generated would be used as a down payment for high leverages. This type of process was very big a couple of decades ago, however now LBO deals are more focused on buying businesses with the intention of adding value to the companies assets rather than the company selling parts of its structure. .

Mezzanine Financing is just a private loan. This type of loan comes from a commercial bank or a venture capital firm that specializes in mezzanines. They usually include subordinated loans or common shares. When you don’t take a full equity position, then a company that specializes in mezzanine debt can lower your risk. This is based on the preservation of capital.

To participate in a private equity or venture capital company, the investor must be accredited. Sometimes even the net worth must exceed a million dollars. For investors whose net worth is a bit lower, then they have the option of trading trading funds. Exchange traded funds are a private equity index. There is a list of numerous publicly traded companies that will invest in private equity.

In general, private equity comes in various forms, and venture capital is just one of those that can help a company through different stages of growth. Everything is based on how the market is turning and the existing cycles.