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Private Equity vs. Venture Capital

Jimmy Khan

Oct 19, 2022 19:30


You've undoubtedly heard of private equity and venture capital if you're searching for investors. But how do they vary, and which course of action should you choose?

Although they are not the same thing, the words "private equity" and "venture capital" are sometimes used synonymously. Both names relate to businesses that make equity investments in private enterprises, although they operate in distinct ways.

Private equity: What is it?

Private equity refers to an investment that a group of investors makes directly in a business. Private equity investors often concentrate on established businesses that have passed the development stage. They often provide money to a struggling company.

Additionally, they will sometimes acquire a company, enhance its operations, and then sell it for a profit. The objective of a private equity investor is to increase the company's value beyond its previous level in order to maximize their return on investment.


Private equity and venture capital have quite distinct differences from one another. However, the distinction between venture capital and private equity continues to baffle many aspiring business owners.

Despite considerable overlap, private equity companies and venture capitalists have different business models.

In this post, we'll examine the merits of both venture capital and private equity and provide you with all the information you need to make an informed choice.


Let's obtain a clear picture of each before we examine every distinction between venture capital and private equity.

How Does Private Equity Operate and What Is It?

Investments in privately held firm stock are referred to as private equity. High net worth individuals or businesses give this investing cash.

A public corporation is often taken over by private equity companies, who then take the company private by removing its shares from all stock markets.

Private equity has recently had a record-breaking era, raising a total of $3.7 trillion from 2014 to 2018.

Three Private Equity Firms to Be Aware Of

Here are a handful of the biggest names among the best private equity companies in the globe.

AIM LLC, Apollo Global

The value of Apollo has increased from its 1990 founding to approximately $150 billion today. Apollo has offices in New York, Los Angeles, London, and Singapore and its clientele includes Caesars Entertainment Group and Norwegian Cruise Line.

Whitestone Group LP

Blackstone Group, which has offices in Beijing, Dubai, and Hong Kong in addition to its headquarters in New York, has acquired around $146 billion worth of private equity assets. Leica Camera and SeaWorld Parks are both part of its broad range of clients.

LP TPG Capital

The Texas Pacific Group is the owner of private equity assets worth around $62 billion. TPG has offices not just in Fort Worth but also in Asia, Australia, and Europe. Among its expanding portfolio, two standouts are Airbnb and China Renewable Energy.


What Value Can a Private Equity Firm Add?

A PE company often buys out underperforming businesses with inadequate management. The business will recruit new management and restructure its debt in order to streamline operations.

Despite the fact that no business enjoys taking on debt, the possibility of a private equity firm taking control is useful, particularly if significant changes are required.

How Does Venture Capital Operate and What Is It?

Wealthy people with this title are known as venture capitalists and give financial support for new startups and rising businesses.

Typically, a limited partnership is created when multiple venture capitalists combine their funds and work together to uncover prospective startups or newly emerging high-growth businesses. In addition to investing their combined cash in the firm, the consortium will purchase an ownership share in it.

Nearly $75 billion was invested in venture capital globally in Q1 2019, according to research by Crunchbase. Compared to the record highs reported in Q4 2018, this is a significant decline.

3 Venture Capital Companies to Be Aware Of

Capital Sequoia

Since its founding in 1972, Sequoia has made investments in more than 250 businesses, which together have a staggering market value of $1.4 trillion. Its emphasis on the IT sector is paying off greatly by supporting titans like Google and Apple.

With Andreessen Horowitz

Andreessen Horowitz gained notoriety for its agency-style strategy, in which partners collaborate with all of the portfolio businesses rather than focusing on a single sector. The business is reorganizing in 2019, according to TechCrunch, to become a registered investment advisor, providing the partners more latitude to explore hazardous endeavors like bitcoin.


Since its establishment in San Francisco in 1995, Benchmark has been doing business there. Its emphasis on early-stage firms has helped the partners, among others, to achieve significant success with Uber, Tinder, and Snapchat.

What Value Can a Venture Capital Firm Add?

A venture investor may provide more to emerging businesses than simply being a silent partner with large resources.

Board meetings for VC partners are frequent in order to monitor their investments. With time, businesses may draw on this expertise as a valuable resource.

In addition, if they have something to lose, venture investors may provide an impetus for fundraising and sales efforts. Additionally, they have strong ties to senior people with specialized expertise, which may aid in the launch of businesses.



Now that you understand the basics, it's time to compare VC vs PE to learn the true distinction between venture capital and private equity.

Let's start now.

1. Stage

While venture capitalists often invest in startups and businesses in their early phases of development, private equity firms typically purchase well-established businesses.

Private equity firms often look for established businesses that are experiencing a slump because of some ineffective management. In order to increase income, PE companies are brought in to simplify processes.

In contrast, VC companies seek after fresh businesses with the potential for rapid expansion. As the only investor in the instant messaging service, WhatsApp is one of the greatest instances of this.

When Facebook purchased WhatsApp, its original $60M investment grew to $3B.

2. Business Types

One of the key distinctions between private equity and venture capital is the kinds of businesses that each is employed for.

Private equity businesses often have diversified portfolios that span every sector, from energy to transportation and from healthcare to construction.

Venture capitalists often have a restricted emphasis on tech businesses in contrast to this broad breadth. Venture money has supported some of the biggest technological disruptors in recent years, such as Uber and Lyft.

3. Deal volume

25% of U.S. private equity transactions, according to PitchBook, are between $25 million and $100 million. The majority of venture capital agreements in Series A investment rounds are around $10 million, despite following funding rounds being substantially larger.

Of course, there are rare exceptions, but on the whole, private equity companies are very wealthy, especially when compared to the wealthiest venture capitalists. As a result, venture capitalist agreements are often dwarfed by private equity purchases.

4. Proportion Acquired

The fact that private equity firms often buy the whole business as opposed to venture capitalists who only get a share is a significant distinction between the two types of funding.

If they don't achieve 100%, a private equity group will at the very least acquire the majority of the shares, thereby asserting control over the business.

Venture capitalists often divide shares with company founders, angel investors, and other venture capitalists or private partners.

5. Risk Taking

Investors in venture capital anticipate that the majority of the businesses they support will ultimately fail. The concept, nevertheless, works because they diversify their risks by investing modest sums in several businesses. They anticipate at least one success, and the return on investment (ROI) from it makes it worthwhile to accept a few setbacks.

Private equity firms would never be successful with this tactic. Even while PE firms only invest in a limited number of companies, every purchase costs far more. The whole fund will collapse if even one firm fails. Private equity firms prefer established businesses since the likelihood of failure is so low.

6. Structure

Private equity companies use a mix of debt and cash to finance their acquisitions, while venture capital funds are just hard cash.

According to reports from QZ, private equity debt is spinning out of control and is already larger than it was in 2007 during the height of the world crisis. The sector is growing despite this possible risk.

Private equity companies are ready and able to invest several years in restructuring the business in order to pay off the debt and recover their original investment since they want to take a piece of the whole pie. The idea of debt restructuring is not an option for venture investors since they like to see a faster return on lesser investments.

7. Return Variances

When comparing venture capital with private equity, the crucial question is this:

Which produces a greater return?

Both venture capitalists and private equity companies aim for an internal rate of return of about 20%. (IRR). However, they often fall short more often than not.

The return on investment for venture capitalists depends on the performance of the best firms in their portfolio. In contrast, private equity profits may come from any kind of business, even less well-known ones.

8. Operations Participation

Firms used to be apprehensive of private equity takeovers because some used a "strip and flip" strategy, taking over companies and dismantling and restructuring them before selling them.

While some workers may still be concerned about losing their jobs and the firm going bankrupt, circumstances have changed. Private equity firms now often work to improve and grow the businesses they acquire. When the time comes to sell, their assets will almost always be worth substantially more as a result.

Contrarily, venture capitalists are more closely connected with businesses outside of the financial sheet, particularly if they have been involved from the beginning of the project. They get more inspired to provide a hand personally as a result of this. However, the degree of their engagement is entirely up to the company owner.


9. Effort

Investment banking is similar to the job done at private equity companies. Even if the workload may be a bit lower, the position still entails identical responsibilities including doing business appraisals, evaluating financial documents, and communicating with attorneys, bankers, and accountants.

The venture capital process, on the other hand, is relationship-driven. As a result, you'll spend more time making calls and less time calculating figures. Some may find the thought of spending their days making cold calls and engaging in sales talk to be the pits, while others may adore it in comparison to gazing at Excel sheets.

10. Pay

Private equity and venture capital associates have a median salary of roughly $150K with variable incentives. Private equity is the way to go, generally, if you want to be confident of getting high returns.

This is not to argue that there aren't any exceptions or that it's impossible to get rich with venture capital. You may transform a tiny investment into a lifetime of wealth if you identify the next Google or WhatsApp before it takes off. To be fair, this doesn't often occur, and not every venture capitalist experiences it either.

11. Culture

People from different backgrounds, especially those in technology, come together in venture capital because of its more laid-back culture. Contrast that with the pure financial backgrounds of many individuals working in private equity.

While private equity businesses need long, alone hours and little time away from the money machine, venture capital organizations often function on a conventional weekly schedule.

The worst aspect, though, is not that.

Power exists wherever there is money. More specifically, there is a fight for power.

Private equity draws ambitious, ruthless people who will do whatever it takes to succeed. Due of this, the workplace environment may sometimes be hostile and competitive.

12. Exit

Money isn't everything in life, right? Now that you've had enough of the hamster wheel, what can you do?

There are a few choices available to individuals in private equity:

Enter the hedge fund industry to create a respectable ROI in a lot less time.

Change to venture funding. The thrill of investing early in a potential new firm is unmistakable, even if the risk-reward ratio may not be as alluring.

Join a business organization. For one of their portfolio firms, many private equity workers take on a senior position in the C-suite or in an advising capacity, such as Head of Business Development.

Cashing out for a decent return is the goal for venture investors. A prompt departure when you've had enough might free you up to work on other things. Here are some alternatives:

first offering to the public (IPO). During an IPO, you may create a return and exit the company by selling your shares to underwriters.

Acquisitions and mergers. A excellent strategy to pool resources and get rid of rivals is to join forces with similar businesses. Additionally, it gives VCs an opportunity to profit from the acquired firm.

share repurchases. Not many businesses can afford to purchase all of your shares, but in bigger businesses, this can be a viable exit strategy.

The distinction between venture capital and private equity has become hazy.

Although private equity and venture capital have distinct distinctions, there are indications that the two paradigms are adopting one another's ideas.

Deals involving venture capital have often been on the smaller side of the spectrum. However, prominent VC firms like Sequoia and Accel have just secured sizable expansion funds and are now actively seeking nine-figure acquisitions.

Private equity firms are looking at growth-stage businesses at the same time as VCs are stepping up to bigger takeover offers. The Next Generation Technology Fund from KRR, which is making significant bets on cybersecurity, is a good example.

In addition, venture investors defy convention by assisting entrepreneurs in going public by employing debt funding. This change is a result of an evolution in which private equity firms are purchasing more venture capital (VC)-backed businesses as the latter's profits start to soar.


Which is better: private equity or venture capital?

Which one should you choose now that you are aware of the distinctions between private equity and venture capital?

It relies on a variety of things, including the kind of business you have, where it is in its development, and your goals for the organization.

Private equity is the greatest if all you want to do is earn a lot of money quickly. However, venture capital is the way to go if you want to team up with affluent business partners and expand your firm as a whole.

Another option is worthy of consideration:

programs for accelerators.

These are quite advantageous for entrepreneurs in the early stages.

Accelerators provide fledgling businesses with capital and infrastructure while also assisting entrepreneurs in developing the skills necessary to grow their company. The best part is that accelerator programs elevate firms with real promise to a point where angel investors and venture capitalists find them considerably more appealing.

In the end, the decision is yours. You may locate a backer who will assist grow your company and your bottom line if you carefully analyze where your firm is currently and where you want to take it.