Investment Banking vs Venture Capital, Compared

Q: Is venture capital the same as investment banking?

No, they are two separate funding methods for small businesses. A key difference between a venture capital firm vs investment banking is that the former seeds money early in the life of a company. Investment bankers, like VCs, seek to earn a strong return on their money, but they fund more mature businesses.

Q: How are venture capital and investment banking different?

There are several differences between venture capital and investment banking. Venture capitalists take stakes in startups and emerging enterprises, while investment banks fund established companies, often through the IPO process. Another differentiating aspect is that working with an investment bank usually involves a large group of analysts, whereas teaming up with a VC might mean doing business with a very small firm.

Q: Do venture capitalists and investment bankers invest in companies at the same time?

No, venture capitalists and investment bankers do not usually invest in businesses at the same time. Venture capitalists prefer to aim for a high return on investment during the early life of a business, whereas investment bankers invest at a later time – often during mergers and acquisitions, exit strategies (like with an IPO), and when dealing with activists.

Investment Banking vs Venture Capital, Compared

Mike ZaccardiUpdated September 7, 2023

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Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.

Investment banking and venture capital are two distinct groups that seek to profit from helping companies. Investment banks typically offer advisory services for a fee and cater to mature corporations. Venture capital (VC), on the other hand, seeks emerging small businesses to invest in. Small business owners should consider the pros and cons of both, along with other options, when trying to grow their firms. Knowing what funding options work best for you is important. You might not desire to give up equity in exchange for capital — in which case, small business loans could be a better choice.

What Is Venture Capital?

Venture capital seeks to earn a high return on investment (ROI) by investing in early-stage and emerging companies. Small firms can acquire funding in a variety of ways, such as through many types of business loans, but they can also offer equity to venture capitalists. The upshot for a small business owner is that if the company goes bankrupt, the venture capitalists share in the losses. If the startup is successful, though, both the entrepreneur and the venture capitalist firm earn big profits. Recommended: 9 Tips for Running a Successful Small Business

How Venture Capital Works

Venture capital funding works by helping small businesses gain the capital they need to grow. A key difference between investment banking and venture capital is that the latter seeds small companies that cannot access large capital markets. VCs take equity positions in many small businesses intending to hit a few home runs that offset many losing investments. Venture capital also works by helping startups from an operational and management perspective — they take board seats to assert influence on how the business is run.

Pros and Cons of Venture Capital

Small business owners should weigh the advantages and disadvantages of venture capital. While VC money can help a startup get off the ground and expand to new markets, the founder’s ownership in the company is reduced by giving up equity to the VC firm. Moreover, risk is spread (which is a positive) and there are no interest costs as with loans, but the cost of equity financing is high. Finally, entrepreneurs must do their due diligence when working with venture capitalists, and your leverage might be weak when negotiating with wealthy venture capitalists. Recommended: What Early Stage Investors Are & How They Work

What Is Investment Banking?

Investment banking vs venture capital are two different funding structures a company can tap.Investment banking is a broad term describing how financial institutions help firms raise capital in order to grow. Raising capital through investment banking is done later in the lifecycle of a business. Investment bankers also work with mature firms and business owners as an intermediary through the initial public offering (IPO) process. Additionally, companies often seek guidance from investment banks when dealing with mergers and acquisitions. Fees from such advisory services are the primary way investment bankers earn profits.

How Investment Banking Works

Investment banking works by helping businesses with raising capital, mergers and acquisitions, business expansion, and more. They make money by charging fees to clients for whatever corporate transactions they handle and advisory services they provide. Small businesses should consider potentially prohibitive costs when working with an established investment bank, though. Overall, investment banks often serve as intermediaries for financial transactions.

Pros and Cons of Investment Banking

There are positives and negatives to weigh with investment banks. While they allow corporations to access a large amount of capital, the fees are often high. An upshot is that an investment bank’s team of experts can offer valuable advisory services, but they often do not cater to small businesses. Finally, large investment banks might have competing interests, as they do business with many types of companies and engage in other financial market activities, such as trading. Recommended: Private Equity vs Investment Banking

Venture Capital vs Investment Banking

There are similarities and differences to know regarding venture capital vs investment banking when it comes to raising capital for your small business.

Similarities Between Investment Banking and Venture Capital

Investment banking and venture capital overlap in that they both offer funding and guidance to growing companies. Equity capital is put to work in such firms and both groups’ goal is to earn large returns. A venture capitalist and investment banker both accept an elevated level of risk when investing in businesses, but VCs take on more risk.

Differences Between Investment Banking and Venture Capital

There are many differences between investment banking and venture capital. For starters, large investment banks often serve as advisors and intermediaries rather than seeding money directly into a small business. While venture capitalists make money through investment returns, investment banks profit more from their advisory fees. Finally, VC money is usually their own capital at stake, while investment banks have access to bigger capital pools.

Alternatives to Venture Capital and Investment Banking to Fund Your Business

Small business owners do not have to look only to venture capitalists and investment bankers for financial help. There are other funding sources to consider.

Small Business Loans

Applying for small business loans is one way to quickly access more liquidity. Entrepreneurs can compare lending rates online to see what options work best for them. Once approved for a loan, you repay the borrowing over time, with interest. The upshot is that you retain all of your equity with this capital-raising approach.

Angel Investors

Angel investors offer funding to help early-stage companies get off the ground. Rather than borrowing money to help your business grow, angel investors provide equity capital from high-net-worth individuals. Angel investors are usually former small business owners themselves, so they want to see young firms flourish. Their guidance is also valuable for a new business owner. Recommended: Tips for Starting a Small Business

Merchant Cash Advance

Merchant cash advances (MCAs) are a claim on future sales. With this funding method, an MCA company provides a one-time cash infusion in exchange for a specific amount of future card sales. An MCA company is paid via a fixed percentage of those sales. This way, the start-up does not have to give up equity or pay borrowing costs.

Compare Lantern Small Business Loan Rates

Venture capital and investment banks are two resources a business can use to grow. Venture capitalists are usually better for funding emerging companies, whereas established and mature corporations tap the services of investment banks for advice and large transactions. Start-ups don’t have to give up equity or pay costly investment banking fees, though. Going with competitive small business loans could be a better approach to help your business grow.Lantern by SoFi offers entrepreneurs a platform to view today’s small business financing rates. With Lantern, you can receive a small business loan offer from one of our leading lenders by filling out one simple form, all with no obligation to you.

Frequently Asked Questions

Is venture capital the same as investment banking?

How are venture capital and investment banking different?

Do venture capitalists and investment bankers invest in companies at the same time?

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About the Author

Mike Zaccardi

Mike Zaccardi, CFA, CMT, is a finance expert and writer specializing in investments, markets, personal finance, and retirement planning. He enjoys putting a narrative to complex financial data and concepts; analyzing stock market sectors, ETFs, economic data, and broad market conditions; and producing snackable content for various audiences.

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