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The difference between private equity vs. venture capital is subtle — both are types of firms that make investments in private companies. In fact, venture capital is typically considered a kind of private equity. However, the difference between these two areas of financial services lies in the types of companies they invest in and the pathways into venture capital (VC) or private equity (PE) careers.
Private equity involves investing in private companies or companies not publicly traded on stock exchanges. Essentially, private equity is the type of investment — equity is money and control in a company, and private equity firms (or PE firms) are the types of financial institutions that make investments into private companies.
Ultimately, “the type of PE firm differs based on the kind of investment activities they undertake,” says Ambarish Srivastava, associate director, private equity and consulting at Acuity Knowledge Partners.
Some firms specialize in buy-outs or purchasing majority stakes of companies, which means the firm effectively gains control over the company and its decision-making. However, venture capital (VC) is also a type of private equity.
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Demystifying the Difference Between Private Equity and Venture Capital
Private equity and venture capital are two major sources of financing for companies. Though they share some similarities there are crucial differences between private equity and venture capital in terms of their investment strategies types of companies funded, and overall objectives.
In this comprehensive guide we’ll explain what private equity and venture capital are highlight the key differences between them, and provide real-world examples. By the end, you’ll have a clear understanding of how private equity and venture capital operate and what sets them apart.
Defining Private Equity
Private equity refers to capital investment in a private company that is not publicly traded on a stock exchange. The goal is to invest capital into promising private companies with the potential for high growth in order to eventually sell the investment for a sizable return.
Private equity firms pool money from institutional investors like pension funds, insurance companies, endowments, and high net worth individuals. This capital is then used to invest in and acquire private companies.
A private equity firm typically takes complete ownership and control of a target company. The intent is to improve the company’s performance and profitability through restructuring before eventually selling it or taking it public for a substantial gain.
Common private equity investment strategies include:
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Leveraged buyouts (LBOs) – Using debt financing to acquire ownership.
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Growth capital – Investing in established companies to expand operations.
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Distressed investments – Acquiring troubled companies and restructuring them.
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Venture capital – Providing startup and growth financing.
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Mezzanine financing – Providing hybrid debt-equity financing.
Some major private equity firms include The Blackstone Group, Carlyle Group, KKR & Co., and TPG Capital.
Understanding Venture Capital
Venture capital is a subset of private equity that refers specifically to financing provided to early-stage companies with strong growth potential. Venture capital firms raise pools of capital from institutions and wealthy individuals to invest in these high-potential startups in exchange for equity ownership.
Venture capitalists typically provide funding early in a startup’s life cycle to help it grow and scale initial operations. The risk tolerance is very high given the uncertainty of emerging companies. The payoff can be substantial if the startup succeeds.
Common investment stages supported by venture capital include:
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Pre-seed funding – Early research and development.
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Seed funding – Initial product development.
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Series A/B – Scaling production and growth.
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Series C/D – Expansion financing.
Well known venture capital firms include Sequoia Capital, Accel Partners, Benchmark, Greylock Partners, and Andreessen Horowitz.
Noteworthy startup companies funded by venture capital early on include Apple, Google, Facebook, Spotify, Airbnb, Uber, and Slack.
Key Differences Between Private Equity and Venture Capital
While private equity and venture capital share similarities, there are critical differences between the two:
Type of Company
- Private equity firms invest in established, mature companies. Venture capitalists invest in early-stage startups and growth companies.
Stage of Company
- Private equity targets companies in later stages of development whereas venture capital focuses on early and growth stages.
Amount Invested
- Private equity firms invest higher amounts, from $100 million to billions. Venture capitalists invest smaller amounts from thousands up to $10-20 million.
Purpose
- Private equity aims to improve operations and cut costs. Venture capital supports innovation, scaling, and expansion.
Risk Tolerance
- Private equity tolerates lower risk when investing in stable companies. Venture capital tolerates very high risk with unproven startups.
Return Expectations
- Private equity targets 20-30%+ returns over 5-10 years. Venture capital seeks high multiples of 5-10x invested capital over shorter periods.
Ownership Stake
- Private equity takes controlling, majority ownership. Venture capitalists take minority stakes.
Liquidity Events
- Private equity seeks exits via acquisition or IPO. Venture capital pursues acquisition, merger, IPO, or failure.
Investor Base
- Private equity comes from institutional investors. Venture capital originates from institutions, firms, and wealthy individuals.
Comparing Investment Approaches
Private equity firms and venture capitalists differ in their overall investment approaches:
Deal Sourcing
- Private equity firms source deals through investment banks, industry contacts, and business brokers. Venture capitalists find deals through startup incubators, angel investor networks, university tech transfer offices, and founder referrals.
Deal Dynamics
- Private equity investments are very structured with formal due diligence and negotiations. Venture capital deals tend to be faster and less formalized.
Growth Strategy
- Private equity grows by cutting costs, optimizing operations, leveraging debt, and acquiring companies. Venture capital grows through product development, customer acquisition, and expanding market reach.
Due Diligence
- Private equity conducts extensive financial, legal, tax, and operational due diligence. Venture capital focuses more on product, technology, team, and market potential.
Post-Investment Involvement
- Private equity maintains full control and oversight of companies. Venture capitalists take a more advisory role with minor control.
Hold Period
- Private equity holds companies for 3-7 years on average before exiting. Venture capitalists exit within 5 years on average but can be much faster.
Exit Strategies
- Private equity exits through IPOs or sales to corporations/PE firms. Venture capitalists exit via acquisition, merger, IPO, or shutdowns.
Real World Examples
Let’s look at real world examples that illustrate key differences between private equity deals and venture capital investments:
Private Equity
PE Firm: KKR
Company: First Data
Deal: $26 billion LBO
Approach: Restructuring, cost cutting, debt optimization
Hold Period: 8 years
Return: 2.3x investment
Venture Capital
VC Firm: Sequoia Capital
Company: Airbnb
Stage: Series B
Amount: $7.2 million
Approach: Expand market reach, optimize technology
Hold Period: 7 years
Return: Over 50x investment
These examples showcase the divergent strategies. Private equity pursued financial engineering and overhauls while venture capital focused on scaling and growth to build business value.
Key Takeaways
Private equity and venture capital provide critical capital to companies but use distinct approaches:
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Private equity funds buyouts of established companies to restructure and resell for profit.
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Venture capital provides early stage and growth financing to unproven but promising startups.
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They differ significantly across funding stages, deal structure, risk tolerance, and investment horizon.
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Private equity relies on financial engineering and operational overhauls to generate returns.
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Venture capital focuses on product-market fit, customer acquisition, and rapid growth.
By understanding these core differences, you can gain insight into the complementary roles that private equity and venture capital play in fueling business growth and innovation.
Types of Careers in VC
Like in private equity, the day-to-day for someone in venture capital depends on the type of firm they work for.
“A typical day might involve deal sourcing, due diligence, meetings, portfolio support, investment decision, industry research, networking, and fundraising for the fund itself,” says Zhao.
VC careers also follow the same progression as private equity, starting as analysts and moving to senior roles, like partner.
>>MORE: Learn more about being a venture capitalist.
How to Get Into Venture Capital vs. Private Equity
You typically need at least a bachelor’s degree in finance, accounting, economics, or business to get a career in private equity or venture capital. However, some firms may prefer advanced degrees, like MBA or master’s degrees in finance or economics.
Beyond your degree, your experience and background matter.
Srivastava suggests a great way to get into private equity is by “gaining experience from working with consulting firms or investment banks.”
For getting into VC, Zhao advises those early in their careers that “roles in startups, investment banking, consulting, or corporate development can also provide valuable skills and exposure.” Additionally, Zhao says, “Internships in venture capital, startups, or related fields can provide valuable insights and connections.”
A specialized certification can help you showcase your skills and become more marketable to extremely competitive VC and PE firms. Some of the main options available to professionals in either career path are:
- Chartered Financial Analyst (CFA): The CFA is often required for investment bankers and other careers in finance. It’s a challenging certification, but once earned, it shows a high level of knowledge in finance and investing.
- Chartered Private Equity Analyst (CPEA): By gaining a CPEA certification, you show employers that you understand PE inside and out.
- Chartered Alternative Investment Analyst (CAIA): The CAIA designation shows strong expertise in alternative investments, such as private equity, real estate, and commodities.
- Financial Risk Manager (FRM): Both VC and PE involve a lot of risk. Financial risk managers, and people with FRM certifications, are experts at assessing risk and charting the best paths forward to keep the company safe.
Private Equity vs Hedge Funds vs Venture Capital… How to tell them apart.
What is venture capital vs private equity?
What is venture capital? Technically, venture capital (VC) is a form of private equity. The main difference is that while private equity investors prefer stable companies, VC investors usually come in during the startup phase. Venture capital is usually given to small companies with incredible growth potential.
What is private equity investment?
Private equity refers to investment in company shares that are not publicly listed. This investment capital is provided by individuals or firms with a high net worth. Generally, private equity firms take control of a public company, which they will later take private by delisting company shares from all stock exchanges. Source: Bain
What is a private equity firm & a venture capital firm?
Both “private equity firms” and “venture capital firms” raise capital from outside investors, called Limited Partners (LPs) – pension funds, endowments, insurance firms, and high-net-worth individuals.
What is a venture capital firm?
Venture capital firms often invest in early-stage companies or startups. They provide capital funds to these companies in exchange for a portion of the company’s equity. Key Points • Private equity and venture capital are two ways that people, funds or companies invest in other companies.
