Venture Capitalist vs. Investment Banker

Many people are involved in the investing sector, from personal investors looking to meet their financial goals to large companies looking to make financial moves that will set them up for continued success. Companies large and small often look for professional advice, services, and funding to create a sustainable, long-term plan. 

Two key professionals that can aid companies are venture capitalists and investment bankers. And while both these roles can support companies, they offer different services. Discover the differences between venture capitalists vs. investment bankers to see the roles they play in the financial world.

What is a Venture Capitalist (VC)?

Venture capitalists or venture capital firms invest in small, fast-growing companies or startups to help them grow. These companies typically have the potential to produce high returns if they find success but are also risky. If they fail, it could cause huge losses. Venture capitalist investors and firms typically invest in many companies, fully expecting some to fail. The goal is that the few successful investments they make will offset the rest of the losses. 

Because they are investing significant sums in small and startup companies, venture capitalists typically end up sitting on the company's board. They’ll have significant influence over how the company operates and grows. The goal is, through their funding and support, to help the company reach success so that they can get decent returns.

VCs often work with companies that are already formed and making a profit but are looking for scale. Before investing, venture capitalists will ensure that the company has a strong management team and growth potential. 

What is an Investment Banker (IB)?

An investment banker is a financial professional or firm that supports the financial needs of companies. They help businesses raise capital, though they do not provide the funding themselves. For example, investment banks can help companies create and successfully execute an initial public office (IPO) and go through the merger and acquisition (M&A) process. They can create debt structures.

An investment banker helps companies through a wide variety of complex financial transactions. Since they do not provide funding to their clients, they do not receive returns. They charge their clients fees for their services, such as advisory fees and commissions. 

Comparing Venture Capitalists and Investment Bankers

Both these financial professionals help companies meet their financial goals, but they differ in many ways, from business models to the returns they make. Here are a few key ways venture capitalists vs. investment bankers differ.

Funding Model

Venture capitalists focus on early-stage startups and young companies that are looking to achieve scale and growth. These are often high-risk investments, and venture capitalists understand there is a strong chance they’ll experience loss in these companies. To generate returns, VCs will fund these companies and provide expertise and mentorship to try and guide them toward growth. 

Investment bankers don’t provide funding. They act as intermediaries through complex financial transactions. They provide a variety of services, such as mergers and acquisitions, underwriting, security trading, creating a debt structure and executing IPOs. They focus on larger, more established companies than venture capitalists that need more complex financial assistance.

Risk and Returns

Venture capitalists have a large risk appetite. When one of their investments succeeds, they make sizable returns. The size of their returns allows them to take on more risk, so they often make many investments fully understanding that many of them won’t succeed. VCs take on high-risk investments for the chance to gain high rewards. Venture capitalists have stakes in the companies they’re investing in, so if the company fails, they lose money. But when those investment companies succeed, they generate large returns for the venture capitalists.

Investment banks have no stakes or shares in the companies they provide services to, so their success doesn’t necessarily determine their compensation. Investment banks make money by charging fees for their services, such as advisory fees and making commissions on trades. They make money by retaining clients and providing successful transactions, but their compensation is not linked to the company's ability to bring in revenue. Investment banks try to mitigate risk for themselves and their clients and generate consistent returns.

Role in Innovation and Entrepreneurship

In addition to providing funding, VCs mentor and provide advice to young and startup companies to help them grow. They help these young companies and entrepreneurs by supporting their business endeavors and giving them the capital to scale their businesses.

Investment banks, on the other hand, primarily work with larger and established companies. They don’t work as closely with fresh startups. However, they do help companies come to the public markets through IPOs so that they can raise equity through investors.

Relationship with Startups/Companies

Venture capitalists work closely with young companies. Since they invest in them, they typically have a place on the company's board. They use this position to influence the company’s decisions, aiming to guide them toward success and growth.

Investment bankers have a more transactional relationship with their clients. They don’t necessarily influence their business decisions; they advise them through financial transactions. They’re not hands-on in everyday dealings.

Industry Impact

It can be challenging for young companies to achieve scale and grow. Venture capitalists play a huge role in helping young companies achieve success and reach larger audiences. They can help them reach larger markets by commercializing their products and increasing marketing efforts or physical locations. VCs can help companies become more prominent players in the market, and help stimulate local and national economies.

Larger, well-established companies don’t necessarily need help with scale or building a foundation. However, they may need help with executing M&As, trading securities or making an IPO. Investment banks help with these transactions, which have a rippling impact throughout the market. They may create investment opportunities for other investors or they may manage a company’s portfolio, which can boost the market. Investment bankers typically handle large amounts of money and execute large transactions, which can boost the economy and market performance.

Supporting Businesses’ Financial Goals

Venture capitalists and investment bankers play a role in businesses’ finances. However, the companies they work with, their relationship with businesses and the services they provide differ. Comparing venture capitalists vs. investment bankers shows that their models and the roles they play could not be more different. 

While venture capitalists invest in new companies, investment bankers guide established companies through complex transactions. VCs are hands-on whereas IBs are more transactional in nature. Venture capital is risky, whereas investment banking prioritizes generating stable returns. However, both play an important role in managing business finances and can help boost business growth and financial success.

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