Private Equity vs Venture Capital: What’s the Difference?

Both young and mature companies have to decide the type of loans they might take out, who they will partner with, and their general operational guidelines. The truth is, investors are the lifeblood of all companies. Finding the right investors is vital to the success of a company.

While there are several types of investors, knowing which investor best fits the company’s needs can accelerate a company’s growth.

 This post will walk you through two types of investors – private equity and venture capital. Often, entrepreneurs fail to see the distinction between private equity vs venture capital. The truth is that these investment strategies have subtle but vast differences.

What Is Private Equity?

Private equity (PE) refers to direct investment in private companies where investors get control of interests in the entity. Investors in private equity are individuals, pension funds, insurance companies, and endowments with a high net worth.

 PE firms target established companies that are deteriorating due to operational inefficiencies. After investing, private equity firms take an active management role.

 The intention is to correct the existing inefficiencies and turn the company profitable. After restructuring the company and improving its operational procedures, PE investors sell it for a profit.

 Some top private equity firms include:

  • The Blackstone Group
  • TPG Capital
  • Apollo Global Management
  • The Carlyle Group Inc.
  • CVC Capital Partners

These firms invest in different companies with long-term investment goals.

What Is Venture Capital?

Venture capital (VC) is a type of private equity that targets startups and young companies. A venture capital firm comprises wealthy individuals and investment banks who pool their resources, forming a limited partnership.

 These individuals (venture capitalists) identify young and startup companies with the potential to grow and generate a high rate of returns.

 Venture capital firms buy equity stakes in multiple companies and use their funds to help those companies grow. Young and startup companies have higher chances of failing. Investors know that they are gambling when specializing in such companies. They might earn higher returns from startups that succeed.

 Venture capital investment is a great way for startups to raise capital. Some top venture capital firms include:

  • Sequoia Capital
  • Accel
  • New Enterprise Associates
  • First Round Capital
  • Khosla Ventures

Is Venture Capital the Same as Private Equity?

The difference between private equity vs venture capital is subtle. Venture capital is technically a type of private equity that involves funding companies at their early stages of growth.

 Unlike private equity firms, venture capital firms are strict in the companies they invest in. They usually fund upcoming tech companies.

 Both firms raise capital from Limited Partners such as high-net-worth individuals, insurance firms, pension funds, and endowments.

 Then, they invest in private companies intending to help those companies grow and sell their investments for profits.

Main Difference Between Private Equity vs Venture Capital

The main difference between private equity and venture capital is in the companies they invest in. Private equity firms invest in mature companies with a firm establishment, while venture capital firms invest in startups and young companies.

 Private equity targets mature companies that have been operational for years. These companies have a track record but are currently distressed, stagnant, or making losses. They need a financial boost and several operational changes to start making profits.

 Conversely, venture capital firms target young and startup companies with the potential to grow.

Other key differences include:

Ownership Status

When private equity firms invest in companies, they usually purchase them entirely. In that case, investors enjoy a 100% ownership status. If they don’t buy the company fully, they enjoy a majority share and an active role in management.

 On the other hand, venture capital firms purchase a minority stake in the company. VC investors split shares with the company owners, allowing them to maintain control.

Deal Size

Private equity firms invest in top-tier companies that require vast amounts of money to grow. Investment amounts can exceed $100 million. After the investment, such companies have minimal chances of failing.

 Venture capital firms invest $10 million or less in young and startup companies. Investors don’t want to make considerable investments in unpredictable companies in terms of success and failure.

Target Companies

Private equity firms invest in a wide range of companies. They can invest in all industries, from energy to healthcare, transportation to construction.

 On the other hand, venture capital firms invest in tech companies only. Examples of these companies are technology, biotech, and cleantech.

Compensation

Investors are interested in salaries, interests, and bonuses, whether private equity or venture capital.

 Private equity firms invest massive amounts and expect to earn significantly. The companies they invest in are well-established, and a financial boost will help them make profits.

 In contrast, venture capital firms don’t expect huge compensations from the companies they invest in. VC firms invest lower capital than private equity investors. Young and startup companies are trying to get off the ground and might not be profitable.

Exit Strategy

A private equity firm aims at improving the company’s current situation and helping it make profits. Once the company grows, PE investors can turn it around and enjoy an ROI.

 Contrary to that, VC firms intend to stick around and enjoy profits for an extended period. These investors look for long-term investment plans that will help the company grow.

Is It Harder To Get Into Venture Capital or Private Equity?

Are you wondering if you have a chance of getting into private equity or venture capital? How easily you get into one of them largely depends on your region. Some regions, such as the U.S, have rigid requirements, especially if you want to get into private equity.

 To get into private equity in the U.S, you should be working at an elite boutique or bulge bracket bank and in the right group such as M&A, industry group, or LevFin.

 Additionally, you must have earned a high GPA from a top undergraduate institution. With such qualifications, you have a higher chance of getting into private equity.

 An alternative option is to network aggressively and target smaller PE firms. If you succeed in getting into a smaller firm, you’ll receive lower compensation, but it will be well worth it.

 Unlike private equity, there are no rigid criteria when getting into venture capital. You don’t need a high GPA from a top undergraduate institution.

Conclusion

If you are well-versed in the tech or healthcare industry and can network, venture capital is a solid option. If you work in a more elite setting or have a large sum saved up, you might be able to get into private equity.

 If you’re a small business, private equity is likely out of the question, but venture capital is accessible with enough knowledge and effort.

 Both of these investment options are valid, but each type suits different needs.

Click here for more details on financing options or call 214-629-7223 or email jthomas@fmconsulting.net for more information. Or, apply now.

An Outsourced CEO and expert witness, Jim Thomas is the founder and president of Fitness Management USA Inc., a management consulting, turnaround and brokerage firm specializing in the gym and sports industry. With more than 25 years of experience owning, operating and managing clubs of all sizes, Thomas lectures and delivers seminars, webinars and workshops across the globe on the practical skills required to successfully overcome obscurity, improve sales, build teamwork and market fitness programs and products. Visit his Web site at: www.fmconsulting.net or www.youtube.com/gymconsultant.

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