Venture capital and investment banking are different, important types of professional finance companies. Not many can differentiate between them except academicians and the experts in the financial circles. Let us explore the differences by defining the two firstly.
Venture Capital:
Venture capital deals with the investment capital of firms seeking venture capital for startups, new businesses and fast-growing firms. The returns could be excellent as also the possibility of losses being high.
Most tiny start-ups are not financially large and cannot access the global markets for capital, unlike larger firms. Yet, they need funds from proven idea to the stage of scaling and beyond to evolve successfully. Venture capital fills this gap by picking up equity in such firms as their investments. Venture capitalists partner the growth of such firms. Since they own significant equity in the companies it is natural that they sit on the board not just to protect their investments but also to significantly influence the decisions, strategies and operations directed at the growth and profitability of the firm.
Venture capitalists, being partners could earn fantastic returns on the success of the venture and also accept losses if the venture fails. It is understandable then that such funds are released in small doses over a period of time as agreed upon.
Investment banking:
The investment banks are also lenders of capital at various scales and from different branches under the same umbrella. They could be direct investors and most often act as intermediaries helping to raise investment capital.
Some examples of companies raising funds are in the issuances of bonds, IPO’s and OIUs. Different branches like retail banking, corporate finance, wealth management etc are involved in offering funds to corporates, syndicated financial institutions and the governments for infrastructure projects. Investment Banking deals with HNI individuals, syndicated funds etc to SMEs and retail products like credit/debit cards, bank accounts for individual investors.
Investment Banking plays the role of an intermediary in the acquisitions and merger deals. They advise on equity markets, mutual fund investments, and play a consultant to borrowers in their financial and borrowing journeys. Their profits trickle in as interest rates charged fees, consultancy retainers and such. Banks may also have in-house trading facilities.
The key differences:
The main difference is in the investment pattern. The banks offer loans at interest. The venture capitalist actually invests directly in the firms in the form of equity. Banks can be the intermediaries of the venture capital deals and the M and A deals. The venture capitalist has no role in the operations of banks.
While the venture capitalist is gunning for large profits earned as a partner in the buss the bank charges interest and fees. The VC may earn profits or lose his capital. The bank operation, on the other hand, does not impact the recoverable fees. They also target different kinds of customers. The VC is basically looking only at borrowers and high-risk operations. The banks, on the other hand, are relatively risk-averse and have investors and borrowers from whom they earn fees or interest for their involvement. Venture capitalists invest in potentially profitable start-ups with huge implications. IBs work with financial institutions and firms who also have access to global markets, and capitals markets abroad.
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IB career-scope and payouts:
In terms of career prospects, salaries, job roles and working conditions there is a lot of overlap between various divisions in the investment banking sectors. However, asset management has a slight lead in job prospects. According to Payscale reports, in early 2004, the average Investment Banking salary was USD 315,000. Ten years later the figures for the IB salary was USD 288,000. Investopedia claims the average 2015 banker’s salary was between USD 75,000 to 85,000.
Conclusions:
Both the VC and IB play important financial roles in the ecosystem of helping firms raise capital. The banks operate in the acquisitions and mergers deals, financial intermediation and capital markets while the venture capitalists invest in the equity capital of startups. Fees and interest are the main sources of earning of Investment Banking whereas the VCs returns depend on the loss or success of the firm.
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