Private equity vs. venture capital: What's the difference?

Starting or growing a company, and need a cash injection? You may be looking into finding an investor, but it can be a daunting prospect if you’re new to it.

The first thing you’ll need to do is decide what kind of investment you’re looking for, and whether your business is suitable for it.

Two terms you’re likely to come across during your research are private equity and venture capital. But what are the differences between the two, and which is the best option for your company? Read on for everything you need to know, starting with a quick rundown of what each of these investment types is and how they work.

And while you’re exploring financial solutions for your startup, make sure to check out the Wise Business account. It’s ideal for companies of all sizes, especially if you have big plans to go global.

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What is private equity?

Private equity (PE) is a term used to describe an investment of capital in a company that is not publicly listed, in return for equity.

PE firms may raise pools of capital in order to create a fund, which is used to buy shares in private companies. These are usually established businesses which are deteriorating, inefficient or in need of transformation. A cash injection aims to turn things around, and make these companies profitable.

It’s often the case that private equity firms will take full control of the company, with a 100% equity stake.¹ This differs from venture capital investors, who normally ask for a much lower stake.

While not always the case, private equity investors tend to focus on traditional industries. For example, manufacturing, agriculture or retail.

What is venture capital?

Venture capital funding is the process of investing money into a startup or small business, usually one with potential for rapid growth. It’s specifically targeted towards new or young businesses, particularly those that are pre-profit and in the early stages of development.

VC investment supports the development and hopefully, the future viability and profitability of the new company.

Venture capitalists provide an investment usually in return for an equity stake in the business, and earn returns by selling shares or receiving dividends when the company makes a profit.

And it isn’t just financial investment that startups may receive as part of a VC funding arrangement. Venture capitalists may also help with strategic advice and mentorship, to refine and optimise the business so as to give it the best chance of success.

Venture capital funding usually works in cycles, or rounds of investment (i.e. Series A, B, C and so on).

This type of funding can be vital for startups, giving them a crucial cash injection and helping them grow faster than they would otherwise. However, it does mean giving up some equity and control in the business.

Venture capital investors usually target tech startups, such as those working in fintech, biotechnology and sustainable tech.

Private equity vs. venture capital - the key differences

There are similarities between private equity and venture capital, which is why the two are often confused. Both refer to equity investments in private companies (i.e. those that aren’t publicly listed or traded).

But the main difference between them is the type - or specifically, the age - of companies they each target for investment. Venture capital firms focus on startups and early stage businesses, while private equity investors target established businesses.

Other differences include:

• Private equity funds typically invest in companies in traditional sectors, while venture capitalists are commonly associated with tech and other innovative industries
• PE investors tend to invest much larger sums and demand a high equity stake, often up to 100%¹
• Venture capitalists may offer mentorship and strategic guidance, including establishing an experienced person on the company’s board.
• Private equity investors use both cash and debt in their investment, whereas venture capitalists only deal with equity.

Here’s an at-a-glance look at how private equity and venture capital compare:

Which is the best option for your company?

If your company is looking for investment, the right option for you will depend on the age and development of your company. If you’re just starting out, a venture capital investment could be the ideal solution.

But if you’re a larger, established business in need of transformation - and you’re happy to cede control to an investment firm - you may want to seek private equity funding.

It’s important to remember though that you should always seek professional advice before entering into any investment agreement, and be aware of what equity and control you’ll be giving away in exchange for funding.

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And that’s it - our comparison of private equity vs. venture capital, including what each investment type is and the key differences between them.

The world of business funding and investment can be very complicated though, so this guide should act as just a starting point for your research into private equity and venture capital investment. It could be well worth seeking professional advice too.

Sources used:

Sources last checked on date: 04-Feb-2025

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