The difference between private equity and venture capital

There are significant differences between the ways in which private equity entities and venture capital firms do business. These differences are as follows:

  • Maturity level. A venture capital firm invests in start-up or growth-stage businesses, with the intent of increasing their initial value. A private equity firm is more likely to invest in a more established business, and then improve its operations in order to increase the value of its investment.
  • Investment trigger. A venture capital firm is looking for a high-grade management team, which it can rely upon to create a high-value business. A private equity firm looks for undervalued assets, which it can use its expertise to enhance.
  • Investment level. A venture capital firm usually takes a relatively small, non-controlling interest in a company, and relies upon the existing management team to enact the changes needed to increase the value of the business. A private equity firm is more likely to buy all of a target company, so that it has complete control over the operations and financing of the entity.
  • Investment scale. A venture capital firm likes to limit the amount of its investments, since each start-up in which it invests is at high risk of failure. Conversely, a private equity firm may plow large amounts into its investees, on the grounds that these more established firms are unlikely to go bankrupt, which reduces the risk of loss.
  • Investment type. A venture capital firm is more likely to buy an equity position in its target companies, while a private equity firm could also loan funds, or provide a mix of equity and debt to its investees.
  • Diversification. A venture capital firm likes to spread its investments among many investees, so that a few losses on some investments are offset by gains elsewhere. A private equity firm tends to concentrate its funds with a smaller number of companies.
  • Expected growth. A venture capital firm needs one or two businesses in its investment portfolio to be a clear winner, which funds its flat or losing investments. A private equity firm targets a reasonable return on all of its investments.

In short, the only things that these types of investors have in common is that they have money to spend - in all other respects, their paths to earning a return are entirely different.