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

Venture Capital vs. Private Equity: What’s the Difference?
Susan Guillory
Susan GuilloryUpdated September 8, 2023
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If you run a business and are looking for working capital, you might be considering bringing on an investor. Both venture capital and private equity are good options to help your startup get up and running or accelerate growth for an established business, though each has its own benefits and drawbacks.

What Is Private Equity?

Both private equity and venture capital provide funds to businesses, though there are differences. Private equity refers to investment capital provided to a private company — that is, one that is not publicly traded on a stock exchange. The investment may come from individual investors or a firm, and these investors receive a stake in the company in exchange for the investment, sometimes as much as 100%. 

How Private Equity Works

A company typically seeks private equity once it’s mature and established, but perhaps struggling to keep its head above water. Investors, whether they are individuals or part of a collective of investors, will provide capital to improve the business with the hopes of generating a high return on investment.Private equity investors typically take a majority stake in the company and look to turn around their investment quickly. They may change processes or replace leadership positions in an effort to streamline operations and get the company back up to full speed and profitability.Once the company is profitable, it may be sold. At that point, a private equity investor can take their payout.Recommended: How to Find Investors

Pros and Cons of Private Equity

Before we dive into the difference between private equity and venture capital, let’s look at the benefits and drawbacks of private equity.
Pros of Private EquityCons of Private Equity
Provides injection of capitalInvestors may take majority stake
Investors may have advice or contacts that help the business growFounder may not like sharing decisions with investors
Can take a floundering company and turn it aroundInvestors may want to sell company before founder is ready

What Is Venture Capital?

Is venture capital private equity? No, though there are similarities between the two.Venture capital is an investment given with an eye on long-term potential. Venture capital can be provided by individual investors or venture capital firms. Some of the biggest venture capital firms have invested in startups you know today, like AirBnB!

How Venture Capital Works

Just like with private equity, a venture capital investor provides funds in exchange for equity in a business, though they tend to take a minority share. They may take a seat on the Board of Directors and be involved in decision-making, and they may also introduce the company to key contacts in the industry that can help them.The startup uses that capital to launch or grow. There is more risk for venture capital investors because the businesses haven’t established stability, though there is also potential for greater reward once the company is acquired or goes public.Recommended: How to Find Venture Capital for a Startup

Pros and Cons of Venture Capital

Below are the benefits and drawbacks of venture capital.
Pros of Venture CapitalCons of Venture Capital
Provides capital a startup can use to launch or growInvestor gets a stake in business
Investor only has a minority stake, so can’t overrule founder in decisionsInvestor may have a seat on the Board of Directors
Investor can introduce business to important contactsEach round of financing dilutes owners’ shares of company

Similarities Between Private Equity and Venture Capital

Now let’s look at private equity vs venture capital, starting with the similarities.Both private equity and venture capital provide much-needed funds for a business to do more, whether that’s to get up and running or improve a stagnant situation.Both involve investors who get a stake in the business. These investors may help make decisions for the company or provide advice or contacts to help the company succeed. They may help the company move toward an exit strategy, either being sold or going public through an Initial Public Offering (IPO).And finally, both venture capital and private equity investors will receive a payout once the company has been sold or taken public. Both types of investors take risks, because there is never a guarantee that they will make their money back.

Differences Between Private Equity and Venture Capital

Though there are similarities between the two, there are also key differences to be aware of.Though both types of financing provide the investor with a stake in the company, private equity investors typically take a majority stake (sometimes up to 100%), while a venture capitalist takes a minority stake.Generally, a private equity investor enters the picture when the business is established and wants to recuperate expenses quickly. This investor may look for a business that is struggling and will find ways to improve profits and ROI.A venture capitalist, on the other hand, oftentimes comes in when the company is volatile and not yet established. This investor knows the risks are high with a startup, but that the rewards can be fruitful.Lastly, private equity investors may pour hundreds of thousands of dollars into the company in an effort to turn things around. Venture capital may come in waves, with incremental investments at each stage of growth.Recommended: 11 Business Growth Strategies

Alternative Forms of Financing

Venture capital and private equity aren’t the only option for a business or startup to get the capital it needs to operate. There are small business loan types for every business, from those that need a line of credit to those looking for commercial loans.Types of small business financing include:
  • Short- and long-term loans
  • Lines of credit
  • Credit cards
  • Invoice financing
  • Equipment financing
  • Merchant cash advances
Recommended: Guide to Applying for and Getting Small Business Loans

The Takeaway

Private equity and venture capital provide access to capital for your small business that you do not need to pay back. Private equity is typically given to established businesses, whereas venture capital is oftentimes involved with startups. Both types of investors can take a stake in your company, with private equity investors sometimes taking up to 100%.

3 Small Business Loan Tips

  1. Online lenders generally offer fast application reviews and quick access to cash. Conveniently, you can find recommended small business loans by using Lantern by SoFi.
  2. If you are launching a new business or your business is young, lenders will consider your personal credit score. Eventually, though, you’ll want to establish your business credit.
  3. If you need to borrow money to cover seasonal cash flow fluctuations, a business line of credit, rather than a term loan, provides the flexibility you likely need.

Frequently Asked Questions

Is it easier to get into venture capital or private equity?
Are hedge funds and private equity identical?
Is it harder to get funding from private equity or venture capital?
Photo credit: iStock/Anchiy

About the Author

Susan Guillory

Susan Guillory

Su Guillory is a freelance business writer and expat coach. She’s written several business books and has been published on sites including Forbes, AllBusiness, and SoFi. She writes about business and personal credit, financial strategies, loans, and credit cards.
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