Venture Capital vs Private Equity – Learn the Differences

Venture Capital vs Private Equity – Learn the Differences

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Rashmi
Rashmi Karan
Manager - Content
Updated on Jan 3, 2024 12:08 IST

Private equity and venture capital are financial entities that help entrepreneurs who want to start new businesses expand and consolidate them. Venture capital is often confused with private capital or vice versa. The article will help you with the concept of venture capital vs private equity. 

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Venture Capital vs Private EquityComparison Table

  Venture Capital Private Equity
Definition  Investments made in firms not publicly listed or traded. Financing of smaller businesses by investors seeking high growth potential.
Company types Funds are given to established companies to aid in their growth. Funds are given to start-ups mainly.
Focus  Corporate governance. Management capabilities. 
Risks associated  Less risks. High risks.
Percentage Acquired Majority stake or 100% of companies. Minority stakes.
Structure A combination of equity and debt. Equity.
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What is Venture Capital?

Venture capital is invested in promising businesses by investors or funds in exchange for a minority stake. It is important to note that venture capitalists put cash into startup business management. And take a non-controlling interest in exchange for your investment.

Venture capital financing can be very useful for startups in the early stages of growth. This can help minimize risk and avoid many mistakes startups make early on. New businesses still have a high failure rate, so having an experienced team offering guidance can be helpful. Venture capitalists also are well-connected and can help find new opportunities.

However, when these startups increase their funding, they dilute their capital and sell shares to their investors. If venture capitalists need to raise additional funds, they will further reduce their ownership and control over the business.

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Example of Venture Capital – Google is one of the most prolific venture capitalists. Under a division known as Google Ventures (GV), the search giant invests in startups with big ideas to help it expand. 

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What is Private Equity?

Private equity is a source of investment capital from high-net-worth individuals and firms. Private equity investors directly invest in a company that is generally more mature. Unlike venture capitalists, private equity tends to invest in exchange for majority control over company management. This means private equity investors have more say in how companies are run and have the power to make significant changes.

One of the advantages of doing business with a private equity investor is that you will have access to more than just cash; you will also benefit from that person’s experience. These investors usually have a majority stake in the company, which means they have a say in running the business. They can make major changes to the business. Private equity investors can sell the company if they believe it is the right decision. 

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What are the Main Differences between Venture Capital and Private Equity?

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The above image describes the major difference between venture capital and private equity, which is – A private equity firm is likelier to invest in a more established business, while a venture capital firm invests in start-up or growth-stage businesses.

Let us check out the main differences between venture capital and private equity are as below, basis different criteria.

Business Type

Private Equity investors look for well-established businesses. These investors often look for struggling companies due to ineffective leadership or poor processes. Then these investors go in, make significant improvements, and sell the businesses for a profit. The return on investment is less, but they also take on much less risk.

On the other hand, venture capital investments are made in companies in their early stages of creation and development. Venture capitalists look for companies with high growth potential and are willing to take more risks.

Control over Business 

Every time investors come in, a certain amount of control over the company will be relinquished. Private equity investors own a majority stake in the business, while venture capitalists only ask for a minority stake.

Business Strategy

Private Equity investors look to improve a business and then turn it around for a quick sale. They mainly participate in the business for a short time.

In contrast, venture capitalists are interested in the company’s long-term growth. They want a substantial payment and are committed to staying until that happens.

Business Share 

Private equity and venture capital are also differentiated by the percentage of shares they acquire from the companies they invest in. Venture capital companies invest between 20 – 30%. At the same time, private equity firms do control investing, where they acquire a majority stake or 100% of companies. 

Investment Duration

The investment time for venture capital entities is 5 – 10 years, while those of private equity are shorter, normally between 3 – 5 years. 

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Conclusion: Venture Capital vs. Private Equity

Private equity investment firms typically hold a majority stake of 50% or more in mature companies operating in traditional industries. They also often invest in established businesses that need to improve due to operating inefficiencies. The assumption is that businesses could become profitable once they correct the inefficiencies. 

In contrast, venture capital investment firms finance and advise startups. These companies are often technology-focused, grow rapidly, and are provided with funding by venture capital firms in exchange for a minority equity stake, less than 50% ownership, in those businesses, another crucial difference between both types of investment. 

So, private equity firms can finance companies in any industry, while venture capital firms are limited to startups focused on technology, biotechnology, or green technology. These conditions can have exceptions as well.


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FAQs - Venture Capital vs Private Equity

How do venture capitalists and private equity investors provide funding differently?

Venture capitalists provide equity financing to startups in exchange for ownership stakes, while private equity investors often use a combination of equity and debt to acquire mature businesses.

What is the investment horizon for private equity investments?

Private equity investments tend to have a more extended investment horizon, often exceeding ten years, as they work on optimizing and eventually exiting their acquired companies.

What is the risk profile associated with venture capital investments?

Venture capital investments are considered high-risk because startups are often more likely to fail. However, successful investments can yield significant returns.

How do private equity investors typically generate returns?

Private equity investors aim to generate returns by improving the performance and efficiency of the companies they acquire, leading to increased profitability and higher valuations upon exit.

Do venture capitalists or private equity investors have a more active role in the companies they invest in?

Venture capitalists often take an active role in mentoring and guiding startup founders. Private equity investors may also be involved but focus more on strategic and operational changes.

What are the exit strategies for venture capital and private equity investments?

Venture capital exits often include initial public offerings (IPOs) or acquisitions by larger companies. Private equity exits may involve IPOs, a sale to another company, or a management buyout.

About the Author
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Rashmi Karan
Manager - Content

Rashmi is a postgraduate in Biotechnology with a flair for research-oriented work and has an experience of over 13 years in content creation and social media handling. She has a diversified writing portfolio and aim... Read Full Bio