Private Equity vs Venture Capital: What are the Key Differences?

Private Equity vs Venture Capital

The terms private equity and venture capital are sometimes mistakenly used interchangeably. Both private equity and venture capital firms share some similarities, for example, they both invest in private companies and exit by selling shares publicly (e.g., through an initial public offering).

In fact, venture capital is technically a sub-type of private equity investing, but there are a few key differences between the two that are important to distinguish when using this terminology.

The size and type of companies are the two main factors that separate private equity from venture capital. Private equity firms invest larger amounts in mature companies that are already established but need financial assistance. Venture capital firms, on the other hand, typically invest smaller amounts in startups or early-stage companies.

In this article, we’ll look more closely at private equity vs venture capital, and the key ways in which they differ so that you can be confident about their investment strategies and aims.

Private Equity vs Venture Capital: Key Differences

1. Industry

Private equity portfolios are diverse, including companies from sectors such as health care, real estate, manufacturing, energy, and infrastructure. They often have a specific target list or sector areas that they specialise in where they focus their investments, however, there is much more variation in the industries private equity firms invest in.

Venture capital investments, meanwhile, are typically focused on tech-driven start-ups or early-stage companies. As the name suggests, venture capital is associated with taking risks and investing in companies that have the potential to generate high returns due to their innovative technology and products, or disruptive business models.

2. Investment Size

Last year, US public equity reached an average deal size of $1 billion. They can range from tens of millions to tens of billions of dollars.

Conversely, venture capital investments are typically smaller, with the average deal size in 2022 hovering around $2 million for seed-stage deals and $10-15 million for later-stage deals.

The reason for the large disparity in deal size comes down to the amount of risk associated with the two types of deals. This brings us on to…

3. Risk Profile

Due to the nature of start-ups and early-stage companies, venture capital firms generally invest in more risky projects. As a result, venture capital investors distribute their capital across smaller investments to spread the risk. They anticipate that most of their companies will fail, but that at least one will become a major success.

Private equity investors on the other hand typically invest larger amounts in fewer, more established companies with a much lower risk profile.

4. Ownership

Private equity firms often acquire full ownership (100%) or invest a majority stake in the companies they invest in. This gives them greater control over the decision-making process and increases their chances of a successful exit when it comes time to sell.

Venture capitalists, however, only purchase minority stakes in companies and do not assume full ownership. This allows the entrepreneurs to remain in control while providing them with access to capital, resources, and expertise when needed.

5. Value Creation

Both private equity and venture capital funds use growth and growing company valuations as a source of returns. However, PE firms also use financial engineering (e.g., cash flow, debt pay-down, and cost optimisation) to improve returns for their investors.

Private equity firms are focused on creating value through management, operational, or financial changes that increase the company’s profitability.

Venture capital funds, on the other hand, focus more on innovation and growth opportunities in order to generate returns.

6. Commitment

Since private equity firms take on a full or a majority share of the ownership of the companies they invest in, they are more directly involved with their companies’ operations. Venture capitalists play a more nurturing role from the sidelines, providing guidance and resources to the companies they invest in.

Nowadays, private equity firms have a holding period of around 6 years before they will exit their investments. Previously the average holding time was around 3-5 years, the increase is explained by lack of suitable exit opportunities and a more competitive private equity market.

The median time for venture capital-backed companies to exit via IPO is around 5 years, though many VC funds have a 10-year horizon to allow for more time for seed-stage deals to grow and scale before exiting.

Using Symanto AI for investment and value-creation opportunities

Symanto AI is helping investors leverage data analytics to analyse investment opportunities and value-creation strategies.

Private equity and venture capital investors can use Symanto AI to identify promising investments, analyse target companies, understand how to optimize operations for long-term success, and run vendor due diligence when it’s time to exit.

To find out more about how Symanto AI can help both private equity and venture capital investors maximise returns, get in touch today.