Private Equity vs. Venture Capital: What's the Difference?

When entrepreneurs have a new product or idea, they require finance to develop it into a full-fledged and mature company. Transitioning from an innovative idea to business operations requires a lot of money and commercial experience, and certain individuals specialize in appraising a startup's risks.

What is Private Equity?

Private equity is a type of investment where capital is injected directly into private companies (meaning companies that are not listed on public stock exchanges) or used to buy out public companies, resulting in their delisting.

Private equity investments typically involve acquiring equity ownership in these companies —thus the name— with the goal of improving their financial performance or otherwise increase their value.

The primary goal of private equity firms is to get returns in their investments through a variety of exit strategies, such as IPOs, mergers and acquisitions.

What is Venture Capital?

Venture capital (also called VC) is a type of private equity investment and funding, which is provided by investors to startups that are thought to have the potential for exponential future growth and expansion after an initial analysis or pitch. Venture capital is often provided by investment banks, wealthy investors, and other financial institutions.

VC investments are usually high-risk and high-reward, with around 70% of all startups ceasing operations and having to liquidate before reaching their fifth year. That's where the "venture" part of venture capital comes from, as private equity firms are ready to take potential losses on most of the private companies they invest on, hoping to hit a jackpot of x100 or even x1000 returns in one company of dozens in their investment portfolio.

Key Differences between Private Equity and Venture Capital

There is a set of key differences between the general concept of Private Equity and the specific approach of Venture Capital. Private equity investors are often part of venture capital firms as one of their forms of investments, though they might engage in other forms of funding to diversify their portfolio and maximize the potential to get returns on investments.

Some of the most glaring differences between Private Equity and Venture Capital are:

Company Stage

Venture Capital

Since it's a more aggressive investment model, venture capitalists focus on early-stage startups. Investments in pre-seed or even idea stage startups aren't unheard of (with the right track record and network, of course) as the risk tolerance of VCs is higher than other, more traditional investment strategies.

Private Equity

Invests in more mature companies that are already established instead of early-stage companies. These companies typically have stable revenues and profits, and private equity firms may invest to support an expansion or other operational projects. Private equity deals care little for growth potential and instead look at a predictable and established cash flow.

Investment Strategy

Venture Capital

Venture capitalists typically provide equity financing in exchange for a minority stake in the company. The goal is to support rapid growth and innovation, often in technology, healthcare, or other high-growth sectors. VC investments are usually made in rounds (Series A, B, C...) to provide companies with capital as they grow and meet specific milestones.

Private Equity

Private equity investors often aim to acquire a controlling or majority stake in a company. The investment strategy usually involves improving the company’s financial performance or operational efficiency, increasing its value, and eventually exiting the investment for a predictable and safe return.

Risk Profile and Return Expectations

Venture Capital

VC investments are considered high-risk due to the early-stage nature of the companies. Many startups fail or do not achieve significant growth, but venture capital funds expect high returns on the few successful investments to compensate for the risk of failures. Their investment focus is on achieving high growth and market dominance quickly.

Private Equity

Private equity investors generally get equity stakes in companies that are considered lower risk compared to VC investments, mainly because they're made in more mature companies with established operations and stable cash flow. However, PE firms often use leverage (borrowed money) to finance acquisitions, which can add financial risk. The returns in PE are driven by improving the company's performance and achieving a profitable exit.

Which kind of investor pays more?

Private equity firms tend to pay more in absolute terms because they invest larger sums in more mature companies with higher valuations. Venture capital firms typically invest smaller amounts in early-stage companies, but the potential returns from a successful startup can be substantial for both the founders and investors. The types of companies each fund invests in play a big part in this question too, as fields like AI development and biotech tend to raise larger amounts of money from all kinds of private equity funds.

The compensation for employees and founders in VC-backed companies often relies heavily on the potential upside of equity, while PE-backed companies may offer a mix of cash compensation and performance-based incentives. Additionally, PE professionals often receive higher compensation due to the larger deal sizes and assets under management.

Who should my startup pitch to?

In general, if you're an early-stage startup without exponentially scaling revenue yet, you'll want to pitch to VC funds for your initial investment. The type of company that can establish itself with a strong and stable enough presence to attract private equity investments can just as well perform well in the public market, so if you find yourself in that position, both options might be worth considering.

In any case, a pitch deck is a delicate document: it can make or break your opportunity to pitch investors of any kind. To make sure your pitch is the best it can be, you can talk to our team and get us to work together with your company on a killer pitch.