Venture Capital, Private Equity, and the Finance of Innovation

Abstract

Venture capital (VC) and private equity (PE) are alternative investment structures that provide capital to companies outside public markets, playing distinctive roles in the financing of innovation and corporate restructuring. Venture capital—equity investment in early-stage, high-growth companies—provides not only capital but active governance, network access, and strategic guidance that public market investors cannot replicate. Private equity buyouts—acquisition of mature companies using leveraged financing—seek to create value through operational improvement, financial engineering, and strategic repositioning. Kaplan and Strömberg (2009) in the Journal of Economic Perspectives (23(1): 121–146) provide the comprehensive survey of private equity’s economics. This paper reviews VC selection and staging contracts, the mechanisms through which VC adds value beyond capital, PE buyout value creation evidence, returns to both asset classes, and the effects of PE ownership on employees, productivity, and innovation.