Financing: How do private equity and venture capital work?(capital privado en murcia)
Private equity companies are specifically looking for companies that have a good risk-return ratio
For budding young entrepreneurs, the question of financing is as important as a good business idea. In addition to loans and crowdfunding or crowd investing, private equity or venture capital is usually also mentioned quickly. But how exactly does it work?
What does private equity mean?
Under private equity - PE for short - refers to investments that people can purchase to non-listed companies. The term translates to "private equity" and is also referred to as "over-the-counter equity capital". The counterpart to PE is a public equity
How does private equity (PE) work?
Private equity companies (also called financial sponsors ) collect money from private or institutional investors (through co-financing with banks and investors). The capital is used to buy shares in companies with the aim of increasing the capital invested. This can be achieved by optimizing an existing company or by investing in a profitable company straight away.
IMPORTANT: Private equity companies are also actively involved in strategy and management.
Which companies are PE invested in?
Private equity companies are specifically looking for companies that have a good risk-return ratio. High and stable cash flow is also important. Higher returns than expected on the money market are expected.
What does venture capital mean?
This is a special form of private equity and is usually translated as "venture capital". Venture capital is made available to a company in the early phase and is therefore associated with a greater risk for the investor: If the business idea does not work, the entire capital employed can be lost. If the plan works, above-average returns are also possible.
GOOD TO KNOW: Venture capital doesn't just have to mean money. An investor often invests knowledge or contacts in a (young) company. The return is then not paid out in the form of money, but instead, the investor receives shares or rights in a company.
Conclusion for young entrepreneurs
As a young entrepreneur, you shouldn't just think about banks and crowdfunding to raise funds. Knowledge and contact transfer also help to bring your company up.
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