Edge-ucation / Venture Capital

Difference between Private Equity and Venture Capital

  • Austin Still

    Austin holds a Bachelor of Commerce from the University of Saskatchewan and brings over 10 years of investing experience. With a belief the most important decision investors make when buying stocks is the price paid, Austin aims to blend growth with value by finding companies with accelerating growth combined with a discounted valuation. More specifically, Austin’s expertise lies in the technology sector, identifying businesses showing strong growth, a lasting competitive advantage, and sound fundamentals, paired with a valuation that supports further stock price appreciation.

    View all posts

Private Equity & Venture Capital Difference

It’s not uncommon to get private equity (PE) and venture capital (VC) confused with one another. In truth, venture capital is a form of private equity investing, meaning these two investment styles share part of the same foundation.

That said, there are also some extremely important differences between private equity venture capital both founders and investors need to be aware of.

If you’re looking to better understand what PE and VC are, how these two investing styles differ, and which is best for you, then you’ve come to the right place.

Overview of the Difference Between Private Equity and Venture Capital

In a nutshell, private equity and venture capital invest in different types and sizes of companies and have different investing goals. They utilize distinct investing strategies, allocate capital differently, and claim different percentages of equity in the firms they invest in.

To better understand the difference between private equity and venture capital, let’s take a closer look at each topic individually.

Understanding Private Equity

To fully understand what private equity is, let’s break it down into two simple concepts.

Private and equity.

First, private refers to the fact that the shares investors own are to a business or entity that is privately owned, meaning the company does not trade on any public financial market.

Secondly, equity means holding shares that represent ownership of, or an interest in, an entity or business.

Put all of that together, and private equity is the ownership of shares in a company that is not publicly traded.

Typically, private equity investing is done by ultra-high net worth individuals or private equity firms. These investors purchase shares of private companies or build large ownership stakes in publicly traded firms with the intention of taking them private at a later date.

Private equity investors do this to make strategic operational changes to the business, aiming to increase profitability and generate more revenue. This inherently increases the value of the company, at which point a PE firm will sell their ownership stake for profit.

Benefits of Private Equity

The benefits of private equity stem from PE firms helping struggling businesses correct their past mistakes and improve their financial performance.

Most private equity firms will target businesses that have begun to struggle for any number of reasons. This can include poor decision making from senior management, new competitors entering the industry, or perhaps a business that has been unable to successfully build a loyal customer base.

In any case, these businesses are lacking in critical areas of their business and need help to correct their sinking ship.

Private equity firms seek out these struggling firms, acquire a controlling interest in the company, and begin to make changes focused on bringing the company back to financial success.

PE firms have access to large amounts of capital, a diverse talent pool, and bring an unbiased opinion on how and why a particular business is struggling. They then use their resources to increase revenue, profitability, and shareholder value.

Understanding Venture Capital

Venture capital is a subset of private equity that provides financing to emerging high-growth startups. VC investment is made by firms or high-net-worth individuals known as venture capitalists.

Venture capital firms invest in businesses that are leveraging new technologies, operating in a fast-growing industry, and innovating beyond what other companies have currently done.

The goal of venture capital investing is to achieve above-average returns by investing in companies still in the development and growth stage of their life cycle. These firms have the majority of growth still ahead of them and are establishing themselves as financially viable companies.

For this reason, VC investing could be considered a higher-risk investing style, as the success of the company is still largely unknown. In exchange for this risk, VC investors expect notably higher returns than what is typically available in public markets.

Venture capital investing has become extremely popular in the last decade, with the following chart from PitchBook showing VC investment increasing exponentially between 2006 to 2021.

venture capital investments meteoric rise

Benefits of Venture Capital

Venture capital brings much-needed financing to fast-growing businesses.

On top of investment capital, a good venture capitalist will also provide founders with industry connections, mentorship, and, most importantly, guidance on how they can successfully scale their business.

Partnering with venture capitalists gives startups access to a wide range of important resources, as well as validation to other potential investors that their business model and future prospects are worth investing in. This helps to attract more investors, customers, and talent. It is crucial for a new investor to familiarize themselves with the advantages and disadvantages of venture capital before they start investing.

Key Differences Between Private Equity and Venture Capital

By now, you should have a better understanding of what private equity and venture capital are and the benefits they bring to the businesses they invest in.

Next, we’ll take an in-depth look at how these two investing styles differ from one another.


When beginning to look at PE and VC, a notable difference lies in the culture and reputation these industries have created.

Venture capital is often seen as an industry filled with high-energy, adventurous individuals who are ready to get their hands dirty in building a business from the ground up.

This is a stark difference from the more traditional private equity industry, which is characterized by a competitive work environment and a higher degree of professionalism.

As a result of this difference in culture, venture capital and private equity tend to attract different individuals. Those who prefer more structure to their workday tend to gravitate towards PE, whereas individuals who enjoy a higher degree of autonomy in their day usually prefer venture capital.

Companies Targeted

While both PE and VC firms won’t focus their attention on any specific industry entirely, there is a big difference in how they allocate their capital.

Private equity usually looks for older companies whose products are simple to understand and whose business model can be changed cost-effectively. It’s common for PE firms to acquire firms and quickly replace senior management with someone who prioritizes cutting costs and improving operational performance. PE firms tend to stay away from companies whose product or technology is complex or difficult to understand.

Comparatively, a VC firm will seek out businesses that are leveraging new technologies to disrupt traditional industries or create new ones. VC firms won’t focus on any particular industry; however, they will ensure businesses are leveraging some kind of innovative technology.

A good example of how VC firms will invest in different industries, yet still focus on technology, comes from video conference firm Zoom and music company Spotify.

Both Zoom and Spotify received VC backing; however, where one has innovated in how employees and companies meet virtually, the other has changed how consumers listen to music. Although these firms operated in very different industries, both leveraged new technology to change how a current industry operates.

Involvement in Day-to-Day Operations

Because a private equity firm will target large private companies that have operations spread throughout entire countries, they will usually take a much less active involvement in the day-to-day operations of a business.

Rather, PE firms are more interested in restructuring debt, replacing leadership positions, or expanding into new markets. The smaller, daily activities of a business aren’t the focus.

This is a notable contrast to VC firms, which are much more interested in the finer details of the businesses they invest in.

These businesses may not have even begun to sell or distribute a product and need help with the daily activities involved in getting their business off the ground. VC firms take a much more active role in the firms they invest in, helping the founders make strategic choices, improve operational efficiencies, and get to know the business and employees on a more personal level.


Private equity firms tend to buy older, more established firms, whereas venture capitalists invest in startups and businesses that are at the beginning of their growth stage.

More specifically, private equity firms focus on mature companies in terms of their growth and market positioning but have begun to struggle due to a variety of factors like poor management, changing market dynamics, or declining cash flow.

After acquiring a controlling ownership stake in these private companies, PE firms work to correct management issues, streamline operations, and improve financial decision-making, with the end goal of being able to sell the newly improved company for more than what they paid for.

VC firms, on the other hand, look for emerging startups and smaller companies that show potential for enormous growth. A great example of this is the popular social media company Snapchat (NYSE:SNAP), which went public in 2017 with a valuation of $25 billion.

One initial investor in Snapchat was venture capital firm Lightspeed Venture Partners, whose initial $8 million investment grew to be worth over $2 billion upon Snapchat’s successful initial public offering (IPO).

Percent of Equity Acquired

Another important distinction between private equity and venture capital is that private equity firms usually look to purchase an entire company, whereas venture capital firms take smaller equity positions.

If a private equity firm doesn’t purchase a firm outright, they will at the very least take a controlling interest (meaning they own more than 50% of the company) to ensure they have the authority and autonomy to make strategic changes to the business.

Comparatively, a venture capital firm will usually take a smaller ownership stake, effectively splitting shares with the founders, angel investors, and other venture capitalists.

Deal Size

The average private equity deal in 2021 totaled $1.1 billion, according to research firm Bain & Co.

This is considerably more than the average VC deal, which in 2021 was just $21.4 million, according to Statista.

Further, some venture capital deal sizes can be even smaller, with initial rounds of funding sometimes totaling less than $1 million.

Because private equity firms are purchasing mature companies outright, they tend to have larger deal sizes compared to venture capital.

Risk Tolerance

Both private equity and venture capital have their risks, but while PE invests in firms that have already established themselves in an industry, VC provides funding to businesses that have yet to prove they can provide value to customers.

Which investment style is riskier?

Typically, VC can be seen as the riskier investment option as the chances of a startup failing is much higher compared to a more established firm tweaking how their business is run.

Investment Structure

Venture capital funds execute all-cash deals, whereas private equity firms fund their takeovers through a combination of cash and debt.

The key point between how venture capital and private equity structure their deals comes down to the length of time and size of transactions. Private equity firms purchase mature companies which are inherently worth more than the startups venture capitalists focus on.

Additionally, where venture capital firms look for a quicker return on investment, private equity firms are willing to spend many years transforming their newly acquired company.

For these reasons, venture capitalists execute cash deals, whereas private equity firms rely on both cash and debt to fund their transactions.

Expected Investment Return

Perhaps the most important difference between private equity and venture capital is the anticipated returns.

Venture capital firms expect to make at least 25% on their investments (though this number may be much higher depending on the business’s growth potential), whereas private equity firms have more moderate expectations of averaging between 10-20%.


You will almost always make more in private equity than venture capital.

According to a study done by Heidrick & Struggles, associate-level employees (which is usually considered an entry-level position at traditional private equity firms) made anywhere between $240,000 – $415,000 in 2021. More senior-level positions have the opportunity to make much more than this.

Venture capital also presents great opportunity to make significant amounts of money. However, this is more likely to come from successful investing than regular salary.

Simply put, if you’re looking to reliably and consistently earn a high salary, then private equity is without question the better option.


When you enter the private equity or venture capital industry, you’ll inevitably begin to wonder what comes next. Depending on which industry you choose, your options will vary.

If you choose to enter the private equity industry, some of your exit options include:

1.) Joining an investment banking firm

Investment banking involves providing financial services, such as raising capital or arranging mergers for corporate and institutional investors. Sometimes investment banking even includes executing private equity deals. However, the industry extends far beyond just this. Investment bankers also invest in the bond market, public equity markets, and non-traditional asset classes (like crypto or art).

Private equity investors and investment bankers hold many of the same skills as both require individuals to be adept at finding lucrative large-scale investment opportunities and be able to fund these deals through both cash and debt.

2.) Going corporate

It’s very common for private equity employees to take senior-level positions at one of the companies their firm acquired. This allows employees to enter a new industry and take on different challenges.

3.) Joining a hedge fund

Private equity can, at times, be slow and monotonous. However, working at a hedge fund requires many of the same skills but happens at a much quicker pace. For those looking for something different yet similar, hedge funds may be the perfect place.

4.) Transitioning to accounting

Key job tasks in private equity rely on understanding financial statements, valuing assets, and combing through spreadsheets to find inaccuracies. These are also common job duties for accounting professionals, who work to prepare a company’s financial statements, assign value to a firm’s assets, and help management make informed financial decisions. The skills acquired in PE can help individuals succeed as an accountant.

5.) Switching to venture capital

While the transaction amount may be smaller, many love the thrill of helping build a company from the ground up. Working in private equity should provide you a solid foundation to transition into the venture capital industry.

For those who chose venture capital, your options for exiting the industry are significantly different. Some of the most common options include:

1.) Initial Public Offering (IPO)

Taking a firm public and offering your shares to underwriters allows you to realize a significant return, allowing you to leave the industry or invest capital elsewhere.

2.) Becoming a business consultant

Being in venture capital gives individuals the ability to learn different techniques, strategies, and approaches to building a business. This knowledge can be extremely valuable to other small to mid-size businesses, which opens the opportunity for venture capitalists to start their own consulting firms.

Companies will pay substantial money to consultants who can show them cost-effective ways of improving operations or penetrating new markets.

3.) Mergers & Acquisitions (M&A)

A common exit for venture capitalists is to have their investments acquired by another firm. This allows you to sell your shares and move onto your next project.

Similarities Between PE and VC

The differences between private equity and venture capital are significant; however, recently, these industries have begun to look more and more alike.

Private equity firms, which have traditionally focused on large takeovers of well-established firms, have begun to include smaller, growth-oriented businesses in their portfolio.

Similarly, VC deals, which have historically been lower dollar amounts compared to private equity, are beginning to close deals totaling more than $100 million. Additionally, venture capitalists are also beginning to structure their deals using debt to help startups go from private to public companies.

All told, both private equity and venture capital firms are beginning to look more similar than ever before. Both realize the potential and merits of the other’s strategy and recognize that implementing a different investing style gives them the ability to increase their potential returns.

Private Equity vs. Venture Capital: Which One is Right for You?

After learning about the key differences and similarities between private equity and venture capital, the question then becomes, which one is right for you?

Truth be told, the answer comes down to your personal goals and what you feel most comfortable with.

If your goal is to make as much money as possible in the shortest period of time, then private equity is probably the best option for you.

Or, if you’re more interested in helping build a company from the ground up and perhaps one day hope to start a company yourself, then venture capital would be a more appropriate choice.

We are not brokers, investment, or financial advisers; you should not rely on the information herein as investment advice. If you are seeking personalized investment advice, please contact a qualified and registered broker, investment adviser, or financial adviser. You should not make any investment decisions based on our communications. Our stock profiles are intended to highlight certain companies for YOUR further investigation; they are NOT recommendations. The securities issued by the companies we profile should be considered high risk and, if you do invest, you may lose your entire investment. Please do your own research before investing, including reading the companies’ public filings, press releases, and risk disclosures. The company provided information in this profile, extracted from public filings, company websites, and other publicly available sources. We believe the sources and information are accurate and reliable but we cannot guarantee it. The commentary and opinions in this article are our own, so please do your own research.
Copyright © 2023 Edge Investments, All rights reserved.


  • Austin Still

    Austin holds a Bachelor of Commerce from the University of Saskatchewan and brings over 10 years of investing experience. With a belief the most important decision investors make when buying stocks is the price paid, Austin aims to blend growth with value by finding companies with accelerating growth combined with a discounted valuation. More specifically, Austin’s expertise lies in the technology sector, identifying businesses showing strong growth, a lasting competitive advantage, and sound fundamentals, paired with a valuation that supports further stock price appreciation.

    View all posts

Leave a Comment

Get 30+ hours of analyst research directly in your inbox weekly. Sign-up today to stay on top of the market.