Chapter 1 - The fundamentals of private equity and venture capital

Abstract

This chapter provides an overview of the fundamentals of private equity and venture capital and highlights important differences between American and European approaches to funding startups and the typical characteristics of the business. The European definition proposes that private equity and venture capital are two separate clusters based on the life cycle of the firm. Venture capitalists provide the funding for start-up businesses and early-stage companies, whereas private equity operators are involved in deals with older firms. Different from the American definition, the European definition does not consider the expansion phase as a part of venture capital, but more of an autonomous subcategory. Although there are differences in definition, private equity and venture capital create a strict relationship between the investor and the entrepreneur. Private equity and venture capital investment are used to invest in equity; for this reason, operators specializing in these kinds of deals decide on the firm's strategy and day-by-day management. This participation, or the admission of a new subject among the original shareholders, generates a metamorphosis in the decision process.