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Venture Capital vs. Private Equity: The Difference

Published On
October 27, 2022
Read Time
Jay Magdani

If you’ve seen Shark Tank (India or overseas version), you might recall a founder or group of founders standing before the panelists waiting to tear their business apart. If a panelist chose to invest in their business, they were awarded money or even mentorship to grow and scale their business. But was it venture capital investment (VC) or private equity (PE)? 

VC and PE are two types of capital funding given to private companies to help them grow their enterprise. But, there are significant differences between the two. And if you are an entrepreneur who plans to raise funding for your company, you should know the difference between them. 

Let’s understand their meaning and how they differ from each other. 

Difference Between VC and Private Equity: An Overview

The major difference is that venture capital (VC) refers to investment in startups, and private equity means investment in well-established companies. Before we discuss what sets them apart, let’s understand their meaning in detail.

Private Equity

Funding given to a company that is not publicly listed is called private equity and is exchanged for a share in the company.

Since there is direct investment, a vast amount of capital is required. Hence, the source of investment is firms or individuals with high net worth. Some famous PE firms are Apollo Global Management LLC, Blackstone Group LP, and TPG Capital LP.

One main advantage of onboarding a private equity investor is the person’s expertise, knowledge, and financial assistance. However, there is also a downside: they will demand a significant portion of the company and have a say in business decisions.

Venture Capital

Venture capital is financing given to startups and emerging businesses with the potential for long-term growth. The assistance may not always be in cash; it can also be managerial or technical expertise. The assistance may not always be in cash; it can also be in the form of expertise. 

The source of investment is usually wealthy investors, VC funds, or investment banks. Sequoia Capital and Benchmark are two of the top venture capital firms.

This type of funding is beneficial for startups who don’t have access to capital markets or bank loans. One has to give equity or shares of the company to investors, which means they would have a say in business decisions. If you raise additional funding rounds, you’ll have to dilute the ownership. 

Key Differences

1. Stage of the Business

One key difference between VC and private equity is the stage of the company in which they invest. VC firms invest in early-stage companies or startups that have the potential to generate high ROI in the future, whereas PE firms assist well-established companies. 

2. Equity Size

Private equity firms usually take 100% or a significant stake in the company they invest in. There are multiple things a PE firm might do after buying a company, such as appointing new management or taking debt against the company. On the other hand, venture capitalists take a minority stake.

However, the size of the deal also depends on the industry. For example, healthcare firms usually raise more significant amounts than tech companies as they need more capital.

3. Industries They Invest In

Another difference between VC and private equity is the industries they invest in.

Private equity firms invest in diverse industries and tend to have varied portfolios. They invest in industries such as healthcare, transportation, etc. However, they finance few companies as each acquisition is expensive.

On the other hand, venture capitalists primarily invest in tech companies and industries that can give good returns. 

4. Risk Involved

Private equity firms invest in mature companies with good track records; hence the risk is low.  However, some PE firms have invested in early-growth startups in the past few years.

Venture capital investment is made in companies with high risk and returns potential. The risk is higher because investment is made in startups or early-stage companies with no proven record, and venture capitalists know that some of them might fail. Hence, they invest a small amount in many companies to not put all their eggs in one basket.

5. Involvement of The Investor

It is generally believed that PE firms buy the company, fire people, appoint new management, and, eventually, sell it off. However, this is not entirely true, as even PE firms share their expertise and help fix operational inefficiencies.

On the other hand, VCs are known for mentoring startup founders. Since they work with startups, they are more connected with its vision and open to sharing their expertise with the founders. However, some VC investors only provide financial assistance and don’t assist in non-monetary ways. 

Bottom Line

These were the key differences between venture capital and private equity investments. As discussed, both invest in companies that are not publicly listed. However, VC firms invest in startups, while PE firms invest in well-established businesses. 

Both types of investments are excellent sources of raising funds for your business. However, which one you choose depends on the stage of your company.

Want to learn more about fundraising?

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