Private Equity vs Venture Capital: Key Differences

Benjamin Debonneville
Founder & CEO
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Private Equity and Venture Capital are big names in business funding. They both aim to pump money into companies, helping them grow. But they’re not the same.

Private Equity puts more money into grown-up companies, while Venture Capital likes to back new, starting-out businesses with smaller amounts. Understanding the basic differences between these two can help choose the right funding path for your company.

This guide will help break down what sets them apart, and guide you in making a smart choice for your business funding needs.

Private Equity: What is it & How it Works?

Private Equity (PE) is a big player in the business world. It's all about investing money directly into a private company or buying out a public company to make it private.

Big firms or wealthy individuals make these investments. They buy shares or take full control with one aim - to help the company grow and then, later on, sell it for a profit.

Now, how does it work? Private Equity firms often target companies that are not doing so well. They use their money and expertise to fix these companies up.

This might mean changing how things are run or cutting costs to make the business more profitable. Once the company is on its feet, the private equity firm can sell it, making more than it invested.

They’re all about the long game, helping companies get back on track, and then enjoying the financial rewards down the line.

Venture Capital: What is it & How it Works?

Venture Capital (VC) is the powerful fuel for startups and innovative small businesses. It's financial support given by investors to young companies with groundbreaking ideas but limited funds.

Understand, this is high stakes, with significant risks involved. The journey begins with VC firms pooling money from partners. They then invest in companies they believe could soar. As these startups evolve, VC firms guide and fund them.

Success stories, like company acquisitions or IPOs, bring substantial profits to the VC firm, shared with their partners. However, if the startup falters, the money is at risk.

Despite the dangers, the potential of grand returns and the passion for fostering innovation make VC a pivotal player in startup fundraising.

At its heart, VC is more than just funding. It's a belief in a vision, an investment in the future, and the thrill of potential breakthroughs.

8 Key Differences Between Private Equity & Venture Capital

In the financial world, Private Equity and Venture Capital play pivotal roles, but they're not identical twins. While both offer capital to businesses, their methods, timing, and focus differ.

Here are the eight key disparities between Private Equity and Venture Capital, that define each realm:

1. Stage and Types of Startups

The stage and types of startups are a major differentiator between Private Equity (PE) and Venture Capital (VC) investments.

PE firms usually hone in on mature companies with a solid track record, even those facing a downturn, focusing on diverse industries. They employ strategies to enhance operational efficiency and financial performance.

VC firms, in contrast, invest in early-stage, high-potential startups, predominantly in the tech and innovation sectors. These companies might not be profitable yet but hold the promise of massive growth.

While PE firms often use leveraged buyouts to acquire companies, VC firms inject funds into research, development, and marketing, offering strategic support with an eye on substantial future returns.

The choice between VC and PE depends on the company's stage, potential for growth, and the level of operational establishment.

2. Deal Size

Discussing the size of investments, PE and VC investments operate on distinctly different scales. PE firms, investing in established companies, often deal with substantial figures.

It's not uncommon for investments to surge to hundreds of millions, with a sizable portion ranging between $25 million and $100 million. In contrast, VC firms, navigating the unpredictable waters of startups, generally limit their investment to $10 million or less, especially in the early funding rounds.

Though these figures can balloon in subsequent rounds, they predominantly remain smaller than PE investments.

This variance in deal size reflects the fundamental difference in their investment philosophy. PE firms aim for impactful changes in established entities, while VC firms spread their bets across multiple young, high-potential companies.

3. Acquired Equity Percentage

Private equity and venture capital firms have different approaches when it comes to acquiring stakes in companies.

Private equity firms usually buy a majority or the entire company, giving them total control and freedom to make significant operational changes. They aim to enhance the company's value by taking the reins.

On the other hand, venture capitalists typically buy a smaller slice, often less than 50%. They prefer to spread their risk across multiple investments.

While providing funding and strategic guidance, venture capitalists don’t oversee daily operations. They invest in early-stage companies, sharing the equity with other investors and leaving operational control to the company's original team.

This clear division in acquired percentage highlights the fundamental difference in the investment strategies of private equity and venture capital firms.

4. Appetite for Investment Risks

Private equity and venture capital firms have divergent views on risk.

Venture capitalists operate on risk, spreading small investments across numerous companies, knowing many will fail but betting on the success of a few. This gamble is balanced by the potentially huge returns from companies that succeed.

Private equity firms, however, steer clear of such risk. They selectively invest in established, mature companies with a proven track record of profitability.

Each investment is substantial, as they often acquire majority or full ownership, and a single failure could spell disaster for the fund.

5. Differences in Returns

Private equity and venture capital both aim for substantial returns, albeit with different expectations and methods. Venture capital firms anticipate higher risks and seek an Internal Rate of Return (IRR) of at least 30%, banking on the significant success of a few portfolio companies.

Private equity firms, more cautious, target a 20-30% IRR, focusing on steadily enhancing the operational efficiency of their acquired companies for consistent returns.

While venture capital hinges on high growth and increased valuations, private equity firms are now also zeroing in on boosting the performance and growth of their investments, beyond just financial adjustments and leveraging, to ensure robust and reliable returns.

Both paths have their strategies for return on investment, molded by their distinct approaches to risk and involvement.

6. Involvement in Business

Private equity and venture capital firms diverge significantly in the business’s operational involvement post-funding.

Typically, a private equity investment is synonymous with a change in leadership and likely an operational overhaul, aiming to enhance and expand the companies for higher value at sale time.

Contrarily, venture capital investments usually retain the existing business control. VC investors, while offering valuable advice and possibly assistance in areas like recruiting, sales, and marketing, generally do not impose operational changes.

Their involvement level is more at the discretion of the business owner, offering a partnership that prioritizes the entrepreneur's vision alongside the growth and development of the company.

7. Plans for Exit

Exit strategies differ substantially between private equity and venture capital.

For PE professionals considering a change, options include moving to hedge funds for potentially quicker returns, switching to VC for early-stage investment excitement, or stepping into senior roles in corporate companies.

On the other hand, VCs often look for timely exits to free up resources for other projects. Common VC exit routes include Initial Public Offerings (IPOs), allowing a public sale of shares, or Mergers and Acquisitions (M&As), where uniting with other companies can offer solid returns and shared resources.

Another possibility is a share buyback by larger firms, providing a direct and straightforward exit.

8. Work Ethics and Culture

Private equity and venture capital showcase distinct work cultures post-investment.

PE, reminiscent of investment banking, emphasizes financial analysis, company valuations, and liaising with professionals like lawyers and accountants The environment is formal, intense, and often competitive, demanding long hours and dedication.

Meanwhile, VC emphasizes relationship-building, with days filled with calls, networking, and evaluating business ideas. The atmosphere is generally more relaxed, pulling in diverse backgrounds, especially from tech.

While PE can be a power-laden, cutthroat world due to high stakes, VC offers a bit more work-life balance and interpersonal interaction.

PE vs VC: Best Choice for Your Startup

Choosing between Private Equity and Venture Capital for your startup? It boils down to your company's phase and objectives.

Opt for PE if fast capital is your game. It's best for established firms aiming to expand or needing partial liquidity. But if your young startup is in search of both growth capital and strategic guidance, VC is your ally. It’s ideal when quick market entry or growth is essential.

Plus, VC is more accessible. You don’t need a stellar resume; proven skills and networking might get you that deal.

So, consider your company's stage, your growth pace, and your industry. Align these with the right funding option for a harmonious business journey.

Final Thoughts

In the end, choosing between private equity and venture capital is crucial for your startup's growth journey.

While PE is a shortcut to hefty capital, it’s tailored for mature firms ready to scale extensively. VC, on the other hand, is a friend of early-stage startups, offering both funds and valuable insights.

The path is clear: assess your company's stage, understand the funding landscape, and align your choice with your long-term vision.

Make a well-informed decision, and embark on the exciting voyage of expanding your venture, ensuring it thrives and prospers in the competitive business ecosystem.

Benjamin gave great tips to my start-up Blend for polishing and optimising my pitch deck, refreshing perspective. Recommend!