The Key Differences Between Venture Capital And Investment Banking

It may be difficult for people outside the financial industry to tell venture capital and investment banking apart. Scott Tominaga, a seasoned financial services industry professional at Partners Admin, breaks down the key differences between investment options.

First, it is essential to understand the basics of venture capital and investment banking.

In a nutshell, Venture capital is when an investor provides capital to a startup in exchange for equity. Working with a venture capital firm usually occurs when the startup is in its early stages and looking for seed money to get off the ground.

Investment banking, meanwhile, is a general term to describe the services that financial institutions provide to assist companies in raising investment capital. Banks can serve as direct investors, but in most cases, they act as intermediaries, notes Scott Tominaga of Partners Admin.

One of the key differences between venture capital and investment banking is how they allocate money to businesses or companies. Venture capital firms typically invest directly into startups, while investment banks usually serve as third parties in various financial transactions.

Consequently, the way they earn profits also differs. Venture capitalists profit from the return on their investments, while investment banks profit from the fees they charge in exchange for their services.

The two investor types further differ in how they target prospective clients. Venture capital firms are more likely to stick to startups with substantial potential or highly projected profitability. They typically provide capital for companies that are still in the early stages. Venture capitalists can assume the risks of putting money in new and emerging businesses.

Meanwhile, investment banks tend to work with businesses that are already established and big enough that they can access the broader capital markets locally and globally.

The specific needs of the company in question will best dictate which option is the most viable, explains Scott Tominaga of Partners Admin.

Scott Tominaga has served as the Chief Operating Officer of PartnersAdmin LLC since 2008. Having been in the industry for years, he has understood financial service firms' middle and back office, compliance, accounting, and administrative functions. More on Scott and his professional background here.