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Private Equity vs. Venture Capital

Ralph Cioffi

Private equity and venture capital are two well-known sources of financing. Like private equity investors, venture capital investors are usually wealthy with a significant capital base. While these two types of funding are quite similar, there are several differences of note.

As noted, private equity investors are individuals or institutions with significant capital to invest. In private equity, the investor invests in a private company or sometimes acquires a major stake in a public company and delists the company from the stock exchange. Venture capitalists often come together to form a limited partnership and invest in companies that they consider promising. Venture capitalists acquire an equity stake in the company through this funding, and then typically offer guidance to help it reach its potential.

Some of the most well-known private equity firms are Apollo Global Management LLC, Blackstone Group LP, and TPC Capital LP. On the other hand, Sequoia Capital, Andreessen Horowitz, and Benchmark are some of the most notable venture capital companies in the US.

One major distinction between venture capital and private equity firms is the maturity of the company they are funding. Venture capital firms often invest in businesses in their early stages, intending to help them scale. On the other hand, a private equity firm is more likely to invest in established businesses with well-established operations. Private equity firms are also typically more involved in helping develop the business to boost market penetration and sales.

Venture capitalists differ from private equity firms because they are initially involved in the target company’s operations. They tend to have a larger stake in the growth and success of the business. However, the extent of the venture capitalist’s involvement in the target company depends largely on the stage of operation at the time of the funding.

Another distinction between private equity and venture capital firms is that the former often involves a group of investors who contribute or pool funds to acquire a company or a part of it. In contrast, venture capital firms invest their funds in the company from the very beginning. This means that venture capitalists assume more risk than private equity firms. Due to the risk involved in starting and growing a business, many venture capital firms expect some of their investments to fail, so they often spread their investment capital across a number of companies.

Private equity firms and venture capital firms also differ in the size of their investment. For instance, private equity firms make larger investments, regularly between $100 million and $10 billion. On the other hand, venture capital firms do not make investments as large as private equity firms. Their investments in startups or early stage ventures usually do not exceed $10 million.

While the venture capital firm puts its money into a business with unproven prospects so it can acquire the necessary capital for the production cycle, private equity firms do not provide funding to get a business off the ground. Rather, private equity firms are more likely to stop funding the business after a couple of years of profitability, ensuring the business is profitable before offering to sell it at a profit. Venture capitalists, on the other hand, scale a business to a point where private equity firms are willing to invest.