Both Venture capital and Investment banking helps start-ups, small business and large business source funding. Both must assess promising investment opportunities, weigh risks, and decide where to invest funds for business growth. Inspite of being an integral part of a business’s growth, they differ in many ways.
Venture capital
Venture capital (VC) is a form of private equity funding that is generally provided to start-ups and companies at the nascent stage. VC is often offered to firms that show significantgrowth potential and revenue creation, thus generating potential high return. Venture capital is long-term risk capital for funding high-tech, risky, but at the same time high-growth projects. Entrepreneurs pool their resources, including management expertise, to help new entrepreneurs through their years. From the project When the projectreaches the profit point, they sell the shares at a high price.
Types of venture capital
Venture capital can be categorised by stages in which it is being invested. It is as follows:
- Seed capital: It is required businesses launch to conduct market research and start forming a company.
- Start-up capital: New firms needing funds for expenses related to marketing and product development.
- First stage or series A: It is provided to the businesses that have a product and want to start commercial, manufacturing, sales and marketing.
- Expansion Capital: Such funding expands a company’s production to other products or sectors and also increases market efforts for new products.
- Late-stage capital: At this stage, you can look for capital to increase marketing and make the company bigger.
- Bridge Financing: In this stage, the funds are used to for activities like mergers, acquisitions and IPOs.
Investment banking
Investment banking is the division of a bank or financial institution that serves governments, corporations, and institutions by providing underwriting, mergers and acquisitions advisory Investment banks act as an intermediary between investors and corporations.
Apart from underwriting, mergers and acquisitions investment banks offer several services such as:
- Help in project financing: Investment banks provide advice on how to finance a particular project, including financial modelling services. They analyse the projects feasibility and recommend the best way to finance it.
- Facilitate brokerages: Investment banks act as intermediaries between buyers and sellers of securities by connecting buyers and sellers.
- Provide investment advice: Investment banks provide investment advice to their clients.They analyse the market and recommend specific investments based on customer’s demand.
- Help in Initial public offering (IPO): Investment banks help companies go public by advising them on the IPO process. They assist in preparing the company for the IPO, including valuation, pricing, and marketing the shares to investors. They also underwrite the shares and guarantee a certain level of funding to company.
Venture Capital vs Investment banking
Basis | Venture capital | Investment banking |
Primary Focus | Venture capital firm focuses on investing in startup companies and small businesses, providing monetary funds to help these businesses grow and succeed. | They offer financial advice and support to companies, including assistance with mergers and acquisitions, financial investment advice, and issuing securities. |
Profit | Typically, venture capitalists look for returns on their investment in a startup or small business, which is their net profit | Investment banks, on the other hand, charge fees for their particular services and earn profit in this way. They may charge different fees depending on the exact service they offer. |
Clients they target | Venture capitalists seek out companies with a large potential for long-term profit by analysing factors such as the strength of the management team, the market for their product or service, and the competitive landscape. | Investment bankers target firms with established growth and a proven track record of exponential growth. They may target established organizations or, in some cases, even government entities. |
Level of Risk | Venture capitalists face a much higher level of risk than investment bankers. This is because they tend to invest in companies that have yet to gain maturity, with no means to guarantee high returns. | Investment bankers don’t face the same level of risk as venture capitalists. Most of the companies they deal with are established and have already gained maturity. |
Stage of Business | Early stage | Mature |
Services | Equity investment, mentoring | Mergers, acquisitions, IPOs |
Conclusion
Venture capital and Investment banking both play important role to drive growth in any industry. By comparing both now we can gain a better understanding of their differences. Although both assist businesses with their financial proceedings, their services differ significantly. Venture capital firms invest in equity for startups, while investment banking firms manage mergers and acquisitions, act as financial intermediaries, and provide financial advice.