Pvt Equity vs VC

Private equity funds invest and acquire equity ownership in private companies, typically those in high-growth
stages. These PE funds purchase shares of private companies or those of public companies that go private and
become delisted from the public stock exchange. There are various types of private equity firms, and depending
on strategy, the firm may take on either a passive or active role in the portfolio company. Passive involvement is
common with mature companies with proven business models that need capital to expand or restructure their
operations, enter new markets, or finance an acquisition. While active involvement does not mean the PE firm
runs the company on a day to day basis, it does mean that the firm plays a direct role in restructuring the
company, reshuffling the senior management, and provide advice, support, and introductions.

While venture capital is a subset of private equity, there are differences between the two. The most notable
difference is that venture capital funds raise capital from investors to specifically invest in startups and small- and
medium-size private companies with strong growth potential. Venture capitalists focus on sourcing, identifying,
and investing in what they believe are entrepreneurs and startups that will succeed and bring large returns later
down the line. Depending on the VC partners’ expertise, VC funds have an industry or sector focus.

Private Equity Venture Capital

Stage PE firms buy mature, public companies. VCs invest mostly in early-stage companies.
Company PE firms buy companies across all Venture Capital are focused on technology, bio-tech,
Types industries. and clean-tech companies.
 It is seen that the PE firms almost always Venture Capital only acquires a minority stake which is
% Acquired
buy 100% of a company in an LBO usually less than 50%.
PE firms make large investments. ($100 VC generally makes smaller investments which are
Size
Million to $10 billion) often below $10 million for early stage companies.
PE firms use a combination of equity and
Structure VCs firms use only equity (Cash)
debt.
Funds are provided to matured companies
Companies Investments are made in startup companies.
having good track record.

Private equity is sometimes confused with venture capital because they both refer to firms that invest in companies
and exit through selling their investments in equity financing, such as initial public offerings (IPOs). However,
there are major differences in the way firms involved in the two types of funding do things. They buy different
types and sizes of companies, they invest different amounts of money and they claim different percentages of
equity in the companies in which they invest.
Private equity firms mostly buy mature companies that are already established. The companies may be
deteriorating or not making the profits they should be due to inefficiency. Private equity firms buy these
companies and streamline operations to increase revenues. Venture capital firms, on the other hand, mostly invest
in start-ups with high growth potential.
Private equity firms mostly buy 100% ownership of the companies in which they invest. As a result, the
companies are in total control of the firm after the buyout. Venture capital firms invest in 50% or less of the equity
of the companies. Most venture capital firms prefer to spread out their risk and invest in many different
companies. If one start-up fails, the entire fund in the venture capital firm is not affected substantially.
Private equity firms invest $100 million and up in a single company. These firms prefer to concentrate all their
effort in a single company, since they invest in already established and mature companies. The chances of absolute
losses from such an investment are minimal. Venture capitalists spend $10 million or less in each company, since
they mostly deal with start-ups with unpredictable chances of failure or success.
Private equity firms can buy companies from any industry, while venture capital firms are limited to start-ups in
technology, biotechnology and clean technology. Private equity firms also use both cash and debt in their
investment, but venture capital firms deal with equity only.
Both “private equity firms” and “venture capital firms” raise capital from outside investors, called Limited
Partners (LPs) – pension funds, endowments, insurance firms, and high-net-worth individuals.
Then, both firms invest that capital in private companies or companies that become private and attempt to sell
those investments at higher prices in the future.
Both firms charge their LPs a management fee of 1.5 – 2.0% of assets under management (the fee often scales
down in later years) and “carried interest” of ~20% on profits from investments, assuming that the firm achieves a
minimum return, called the “hurdle rate.”
But beyond these high-level similarities, almost everything else is different, at least in “the classical view” of these
industries:
 Company Types: PE firms invest in companies across all industries, while VCs focus on technology,
biotech, and cleantech.
 Percentage Acquired: Private equity firms do control investing, where they acquire a majority stake or
100% of companies, while VCs only acquire minority stakes.
 Size: PE firms tend to do larger deals than VC firms because they acquire higher percentages of companies
and focus on bigger, more mature companies.
 Structure: VC firms use equity (i.e., the cash they’ve raised from outside investors) to make their
investments, while PE firms use a combination of equity and debt.
 Stage: PE firms acquire mature companies, while VCs invest in earlier-stage companies that are growing
quickly or have the potential to grow quickly.
 Risk: VCs expect that most of their portfolio companies will fail, but that if one company becomes the
next Facebook, they can still earn great returns. PE firms can’t afford to take such risks because a single
failed company could doom the fund.
 Value Creation / Sources of Returns: Both firm types aim to earn returns above those of the public
markets, but they do so differently: VC firms rely on growth and companies’ valuations increasing, while
PE firms can use growth, multiple expansion, and debt pay-down and cash generation (i.e., “financial
engineering”).
  Operational Focus: PE firms may become more involved with companies’ operations because they have
greater ownership, and it’s “on them” if something goes wrong.
 People: Private equity tends to attract former investment bankers, while venture capital gets a more diverse
mix: Product managers, business development professionals, consultants, bankers, and former
entrepreneurs.
 The Recruiting Process: Large PE firms follow a quick and highly structured “on-cycle” process, while
smaller PE firms and most VC firms use “off-cycle” recruiting, which starts later and takes longer.
 Work and Culture: Private equity is closer to the work and culture of investment banking, with long
hours, a lot of coordination to get deals done, and significant technical analysis in Excel. Venture capital is
more qualitative and involves more meetings/networking, and the hours and work environment are more
relaxed.
 Compensation: You’ll earn significantly more in private equity at all levels because fund sizes are bigger,
meaning the management fees are higher. The Founders of huge PE firms like Blackstone and KKR might
earn in the hundreds of millions USD each year, but that would be unheard of at any venture capital firm.
 Exit Opportunities: Working in VC prepares you for other VC firms, startups, and operational roles; if
you work in PE, you tend to continue in PE or move into other roles that involve working on deals.

Key Differences Between Private Equity and Venture Capital

The major differences between private equity and venture capital are indicated below:
1. The investments made in the private companies by the investors is known as Private Equity. Venture
Capital, on the other hand, refers to the capital contribution made by the investors with high risk and return
potential.
2. Private Equity, Investments is made at the later or expansion stage, whereas in Venture Capital the
investment is made in the early stage i.e. seed stage or startup stage.
3. Private Equity firms make investments in few companies only while Venture Capital firms, make their
investments in a large number of companies.
4. Private Equity funds are provided to matured companies that are having a good record. Conversely,
Venture Capital funds provided small business but do not have the desired track record.
5. Private Equity investment can be made in any industry. As opposed to Venture Capital, in which
investment is made in high growth potential industries like energy conservation, biomedical, quality up-
gradation, information technology and so on.
6. The risk profile in venture capital is comparatively higher than private equity.
7. In private equity, the funds are utilized in the financial or operational restructuring of the Vendee company.
On the other hand, venture capital funds are utilized in streamlining business operations by way of
developing and launching new products or services in the market.
8. In general, private equity firms have 100% ownership in the investee company, but venture capital firm’s
ownership in the investee company is not more than 49%.