What Is The Difference Between "Venture Capital" and "Private Equity?"

Question: You guys talk about Private Equity (PE) and Venture Capital Funds (VC). What’s the difference?

Our Take: Well, you “caught us.” Technically, VC is a subset of PE. Private Equity deals are simply deals that aren’t available for public participation. This includes VC, angel investing, hedge funds, buy out funds, etc.

The definition of all of these terms is getting more blurry, as each of them has morphed a bit to play in each other’s sandbox. For instance, angel investors now compete with VCs on small, very early stage deals, while some of the buyout and hedge funds are doing larger VC-type deals.

Traditionally, the term “venture capital” was used to designate investments in early “start up” companies. These deals were generally regarded as too high-risk and too early in their life cycles to interest other PE players.

All of this being said, the term Private Equity has the connotation of meaning “everything but angel or VC.” When we’ve used PE in our posts, we have referred to bigger funds that do later stage deals, hedge and buyouts – the types of deals that traditional VCs do not do. I would expect, given our comfort with this nomenclature, we’ll continue this in the future.

  • MRM

    I’d add a slight modification to your venture capital description. a VC invests in early stage companies: check. But a VC invests “equity” rather than debt. A venture debt lender is a lender, for example, regardless of the stage of company.
    Debt isn’t equity, therefore venture debt isn’t a subset of venture capital.

  • “Private Equity deals are simply deals that aren’t available for public participation.”
    Similar to the other comment, the easiest way to show the important difference would be to say “Private Equity deals are simply equity deals…”
    While I’m posting on this I would like to mention that tech startups and the VC world seem surprisingly blind to debt financing. Maybe that’s because the companies involved aren’t ‘credit-worthy’ by some standards. I do think there’s a lot of potential value in understanding debt financing that could be a part of this overall discussion that is almost always ignored.

  • Bhadra

    what i think Venture capital and private equity are differen in following manner:
    1. In Size (PE – Large; VC – Small)
    2. structure of finance (PE – only equity; VC – Debt+Equity)
    3. stage of funding (PE – later stage; VC – early stage)
    Mumbai, India

    • Tfool

      1. Wrong
      2. Very Wrong
      3. Right

      Comment on something you know about next time. 

  • Technically speaking there is no substantial difference between VC & PE investments. PE is a asset class which includes VC, hedge funds, buyouts etc. VC investments are generally in the startup companies with the innovative idea of doing business. There could be a strong growth story ahead but the same time high risk proportionally. Eg- The VC investor exited their investments in websites during the online boom before 2000. PE invest in the companies with the consistent record of revenue and in later stage or the companies with the strong financial base.

  • Magnum Glass
  • We were asked by many times the same question by our members. The article you have provided and the comments below it helped (at least me, personally) to clear up the nomenclature. Thanks!