Venture capital and investment bank can be hard to differentiate for many beyond the financial industry. While both of these types of financial companies are similar, they are quite different also. Here’s a quick break down of the differences you should know. First, what is venture capital? Venture capital is a kind of investment capital, where the venture capital firm invests in a fresh or fast-growing business or start-up that have the prospect of significant returns, but also a higher threat of reduction.
Small start-ups aren’t large enough to access the global capital markets available to large, established companies. Many of these start-ups still need sizable amounts of capital to level their businesses into significant entities. Venture capital firms fill in this gap between proven idea and scale by investing in these ongoing companies, by firmly taking equity stakes typically. Venture capitalists, those investors and companies that provide venture capital, make many, relatively small investments with the hope a few will have outsized success.
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The opportunity capitalists accept that some of their investments will fail and lose their capital, however, the select few homeruns should offset those deficits with left over for significant earnings enough. Because venture capital companies to take equity stakes when they invest in a company, venture capitalists will often take board seats at the company and exert significant influence on how the business operates.
So what’s investment bank, then? An investment bank or investment company is a general term to spell it out banks that assist companies in raising investment capital. These banks are intermediaries generally, but can be direct investors also. At their core, they help individuals or businesses raise capital. For instance, when a company wants to become listed on the general public marketplaces via a short open public offering, the company will hire an investment bank or investment company to help them deal with regulatory issues, find investors, and implement the IPO successfully. Or, if an ongoing company wishes to obtain or be acquired by another company in a merger or acquisition, investment banks will become the brokers in the transaction, assisting the investing company.
Investment banks also have helped their clients with raising debt from both bond market as well as from banks or other lenders. Other times still the investment bank or investment company may simply act as an advisor, providing advice to an ongoing company on financial issues or possible M&A opportunities. Investment banks primarily earn their profits by charging their clients fees to assist them in whatever role the bank takes on.
This could be advisory fees for advice, broker fees or assisting in a merger or acquisition, or any true number of other fee structures. Some investment banks also have internal trading businesses, where the bank or investment company investments securities to produce more profits even. The first and primary difference between venture capital and investment banking is that venture capital firms typically invest straight into companies, while investment banks have a tendency to serve as intermediaries in a variety of financial transactions. Therefore, they also earn their profits in different ways.
Venture capitalists rely on the comes back from their investments, and investment banks are more likely to charge fees because of their services. Venture capitalists and investment banks also target different prospective customers. Venture capital firms tend to stick to high potential start-ups with big upside. Investment banking institutions will work with established firms that currently have the size necessary to access the broader capital marketplaces in the U.S.