From looking at the risk acquisition to seeing the fund size, here are six answers to the question, “What are the key differences between private equity vs venture capital?”
- The Risk Acquisition
- The Level of Control the Investor Typically Seeks
- The Track Record and Time Horizon
- The Source of Funding
- The Investment Stage
- The Size of Investment
The Risk Acquisition
There are several differences between private equity and venture capital, but one of the main separations occurs in risk acquisition.
All investment comes with risk, and this can cover everything from the loss of the original investment to potential legal liability. Sophisticated investors take this into account before deciding whether they will commit their resources.
In line with this thinking, private equity firms generally pursue 100% ownership of the companies in which they invest, assuming all risks but also controlling every aspect of the business, mitigating the chances of a loss from a top-down structure.
Venture capitalists are more reserved and choose to carry less than 50% equity, allowing them to diversify their portfolios. This limits their risk, especially for their full resources, as a total loss in one investment will not devastate their funds.
Cody Candee, CEO, Bounce
The Level of Control the Investor Typically Seeks
One key difference between private equity and venture capital is the amount of money invested and the level of control the investor typically seeks in the company.
Venture capitalists typically invest smaller amounts of money for a minority stake in early-stage businesses. Venture capitalists also often provide more than just financial support, offering strategic guidance and networking opportunities to help the company succeed.
Private equity investors, on the other hand, typically invest larger sums of money for a controlling stake in established companies. Private equity investors often have a more hands-on approach to management, seeking to increase profitability and streamline operations to maximize returns.
Luciano Colos, Founder and CEO, PitchGrade
The Track Record and Time Horizon
The fundamental difference between private equity and venture capital is their investment focus. Private equity firms typically invest in more mature, established companies with a proven track record of generating revenue and profits. They take control of these companies and work to increase profitability.
Venture capital firms, on the other hand, invest in early-stage companies that are still in the development phase and have yet to establish a proven business model or generate significant revenue. They take on more risk and invest with the expectation of generating high returns if the company is successful.
Another difference is the investment horizon, with private equity having a longer horizon of five to seven years or more, while venture capital has a shorter horizon of around three to five years.
Shane McEvoy, MD, Flycast Media
The Source of Funding
Private equity firms typically raise capital from institutional investors, such as pension funds and insurance companies. On the other hand, venture capital firms source their capital from high-net-worth individuals called limited partners.
The difference in the preferred source of funding between the two is because of a couple of factors. Private equity firms typically invest large amounts of capital to see significant gains since they are investing in mostly matured companies.
In contrast, venture capital firms invest significantly lower capital since they are investing in companies that are still on the come-up. Additionally, venture capital firms rely on equity financing, which means they hold equities to the company that they invest in.
Since startups usually have lower valuations, they do not need massive capital to hold a significant share of the companies compared with private equity firms that use debt financing.
Jonathan Merry, Founder, Moneyzine
The Investment Stage
One major difference between private equity (PE) and venture capital (VC) is the stage of the companies they invest in.
Private equity firms typically invest in established, mature companies that are looking to grow, expand, or restructure. These companies are often profitable and have a proven track record, but may need additional capital to fund their growth or make strategic acquisitions. PE firms often take a controlling stake in the companies they invest in and work closely with management to improve operations and increase profitability.
In contrast, venture capital firms typically invest in early-stage companies that are developing and commercializing new products or technologies. These companies are often not profitable and may have little to no revenue, but have the potential for significant growth in the future. VC firms typically take smaller ownership stakes, with the goal of generating larger returns when the company goes public or is acquired.
Will Strickland, Management Consultant, Will Strickland
The Size of Investment
A venture capital business prefers to limit its investments because each start-up in which it invests is highly likely to fail.
A private equity firm, on the other hand, may spend big sums on its investees because these more established enterprises are less likely to go bankrupt, lowering the risk of loss.
In my opinion, a venture capital firm is more likely to buy equity in its target companies, whereas a private equity firm may lend cash or give a mix of equity and debt to its investees.
Adam Garcia, CEO, The Stock Dork