Investments
Venture Capital vs. Private Equity: Key Differences Explained
When it comes to investing in companies, two terms often come up: venture capital (VC) and private equity (PE). While both involve investing in businesses to generate returns, they are very different in terms of strategy, focus, and the types of companies they target. If you’re a business owner looking for funding or planning to exit your company, understanding these differences is crucial.
In this article, we’ll explain what venture capital and private equity are, their key differences, and how each works in practice. Let’s dive in!
For a to the point video on VC vs PE check out YouTube Business Law Toolbox.
What is Venture Capital (VC)?
Venture capital refers to financing provided to early-stage and typically high-growth companies with strong potential but often more or less unproven business models - the companies are as a rule not profitable yet. VC firms invest in startups that need capital to scale their operations, develop their products or offerings, or break into new markets.
Key Features of Venture Capital
The target companies: are startups or (typically) small businesses with high growth potential. The risk level is very high as most startups fail, but successful ones yield enormous returns. VC firms will do a larger number of smaller investments compared to private equity, with investments often ranging from tens of thousands to many millions of dollars. The VC firms will acquire minority stakes (oftentimes 20-25%, but may be much more or much less) in the business. They hence prefer to act as co-investors with a great focus on ensuring that the founders have a sufficient stake in the startup also post-investment.
The financing model: VC firms typically invest using only their own capital (or rather, the capital that their limited partners have committed to the fund). Given the high risk/high reward nature of VC investing, it is more uncommon that VC firms use leveraged financing when deploying capital into the companies – both due to risk appetite, and due to the fact that the increased risk level would reflect on interest rates that lenders would be willing to provide.
The role of the VC: As regards the ongoing role, venture capitalists often provide mentorship, expertise, and networking opportunities to help startups succeed, so they have an active role (the extent to which will however vary). But typically the founders of the company will still have a significant degree of control over day-to-day operations as well as over long-term strategy.
Example: A venture capital firm invests $2 million in a tech startup in exchange for a 15% equity stake, betting on its innovative product to dominate the market.
What is Private Equity (PE)?
Private equity involves investing in more mature, established companies that are underperforming or in need of restructuring. PE firms often buy out companies - i.e. they want to buy 100 % of the existing equity from existing shareholders, rather than investing into the company itself. Then they focus on improving the target companies’ operations, typically with an aim to cut costs, sometimes to deploy a buy-and-build strategy, with the goal of eventually selling them at a profit.
Key Features of Private Equity
The target companies: are mature businesses that are undervalued, underperforming or ready for significant restructuring, or otherwise are seen as opportunities for continued development and growth. The risk level is generally lower than VC because the companies are already well-established and oftentimes profitable. However, with leveraged finance the risk and the reward can increase.
The financing model: While PE firms deploy their own capital (i.e. again the capital committed by the limited partners), they typically seek to borrow as much money as possible. This is called leveraged financing, and means that any value increases will be magnitudes larger than if the fund only invested its own capital – and conversely, any value decreases will hit the fund’s own capital first.
The ability to borrow capital also enables PE funds to sometimes undertake so-called “refinancings”, where they basically take out new loans to repay capital to their limited partners (and themselves), thereby in a sense exiting the same company twice – or more.
The role of the PE: PE firms do so called buy-outs, meaning that they buy the company and take control – oftentimes by acquiring the entire share capital of the company, save for a small stake held by or given to key management. They typically do not deploy capital into the company itself, but rather acquire existing shares from existing shareholders. This can take the form of buying a private company, or making a public bid on the shares of a listed companies. Accordingly they will do larger investments, sometimes in the hundreds of millions or even billions of dollars.
Since the equity stake that PE firms typically acquire will be a majority stake (more than 50%) or full ownership of the company, they will typically take a very active mangement role, often changing the entire management of the company to be able to implement their own strategy. So while VC investors often treat founders as the stars of the show, PE investors are typically much more demanding owners.
Example: A private equity firm buys a struggling retail chain for $500 million, restructures it, and sells it for $1 billion after three years.
Key differences between Venture Capital and Private Equity
Aspect | Venture Capital | Private Equity |
Stage of Investment | Early-stage or high-growth startups. | Mature, established businesses. |
Risk Level | High risk—startups may fail. | Lower risk—companies are already operational. |
Investment Size | Smaller investments: thousands to millions. | Larger investments: hundreds of millions+. |
Transaction type
Equity Stake | Minority ownership (<50%). | Majority or full ownership (>50%). |
Involvement | Strategic advice, mentorship, and networking. | Restructuring, cost-cutting, and active management. |
Exit Strategy | IPOs or acquisitions. | Sale to other firms or public listing. |
Which is right for your business?
Focus on Venture Capital if:
You are running an early-stage startup with high growth potential.
You need capital to scale your business and access expertise.
You’re willing to give up a small equity stake but want to maintain control of your company.
Focus on Private Equity if:
You run a mature business that needs significant restructuring, operational improvement, or a turnaround strategy.
You are comfortable with selling a majority or full stake in your company - i.e. you want to sell your company and cash-out.
You’re focused on boosting profitability and achieving a high valuation for an eventual sale.
Why Does the Difference Matter?
Understanding the differences between venture capital and private equity matters because:
Business Owners: Knowing where your company stands helps you attract the right type of investor.
Investors: It helps you align your risk appetite and return expectations with the right investment strategy.
Job Seekers: Knowing these terms helps you identify the culture and strategy of firms you might want to work for.
Final thoughts VC vs. PE basics
While both venture capital and private equity involve investing in businesses to achieve significant returns, the key differences lie in the type of companies they target, the level of risk they take, and their investment approach.
Venture Capital fuels innovation and growth for startups with potential.
Private Equity turns around established businesses to make them more profitable.
For business owners and investors alike, knowing where your goals align ensures that you make the right funding or investment decisions.
If you have any input or want to learn more, or need assistance in an investment process please reach out on kat@stgcommerciallaw.com
London, 1 July 2025 Author: Kat Strandberg
For a to the point video on VC vs PE check out YouTube Business Law Toolbox.
What is Venture Capital (VC)?
Venture capital refers to financing provided to early-stage and typically high-growth companies with strong potential but often more or less unproven business models - the companies are as a rule not profitable yet. VC firms invest in startups that need capital to scale their operations, develop their products or offerings, or break into new markets.
Key Features of Venture Capital
The target companies: are startups or (typically) small businesses with high growth potential. The risk level is very high as most startups fail, but successful ones yield enormous returns. VC firms will do a larger number of smaller investments compared to private equity, with investments often ranging from tens of thousands to many millions of dollars. The VC firms will acquire minority stakes (oftentimes 20-25%, but may be much more or much less) in the business. They hence prefer to act as co-investors with a great focus on ensuring that the founders have a sufficient stake in the startup also post-investment.
The financing model: VC firms typically invest using only their own capital (or rather, the capital that their limited partners have committed to the fund). Given the high risk/high reward nature of VC investing, it is more uncommon that VC firms use leveraged financing when deploying capital into the companies – both due to risk appetite, and due to the fact that the increased risk level would reflect on interest rates that lenders would be willing to provide.
The role of the VC: As regards the ongoing role, venture capitalists often provide mentorship, expertise, and networking opportunities to help startups succeed, so they have an active role (the extent to which will however vary). But typically the founders of the company will still have a significant degree of control over day-to-day operations as well as over long-term strategy.
Example: A venture capital firm invests $2 million in a tech startup in exchange for a 15% equity stake, betting on its innovative product to dominate the market.
What is Private Equity (PE)?
Private equity involves investing in more mature, established companies that are underperforming or in need of restructuring. PE firms often buy out companies - i.e. they want to buy 100 % of the existing equity from existing shareholders, rather than investing into the company itself. Then they focus on improving the target companies’ operations, typically with an aim to cut costs, sometimes to deploy a buy-and-build strategy, with the goal of eventually selling them at a profit.
Key Features of Private Equity
The target companies: are mature businesses that are undervalued, underperforming or ready for significant restructuring, or otherwise are seen as opportunities for continued development and growth. The risk level is generally lower than VC because the companies are already well-established and oftentimes profitable. However, with leveraged finance the risk and the reward can increase.
The financing model: While PE firms deploy their own capital (i.e. again the capital committed by the limited partners), they typically seek to borrow as much money as possible. This is called leveraged financing, and means that any value increases will be magnitudes larger than if the fund only invested its own capital – and conversely, any value decreases will hit the fund’s own capital first.
The ability to borrow capital also enables PE funds to sometimes undertake so-called “refinancings”, where they basically take out new loans to repay capital to their limited partners (and themselves), thereby in a sense exiting the same company twice – or more.
The role of the PE: PE firms do so called buy-outs, meaning that they buy the company and take control – oftentimes by acquiring the entire share capital of the company, save for a small stake held by or given to key management. They typically do not deploy capital into the company itself, but rather acquire existing shares from existing shareholders. This can take the form of buying a private company, or making a public bid on the shares of a listed companies. Accordingly they will do larger investments, sometimes in the hundreds of millions or even billions of dollars.
Since the equity stake that PE firms typically acquire will be a majority stake (more than 50%) or full ownership of the company, they will typically take a very active mangement role, often changing the entire management of the company to be able to implement their own strategy. So while VC investors often treat founders as the stars of the show, PE investors are typically much more demanding owners.
Example: A private equity firm buys a struggling retail chain for $500 million, restructures it, and sells it for $1 billion after three years.
Key differences between Venture Capital and Private Equity
Aspect | Venture Capital | Private Equity |
Stage of Investment | Early-stage or high-growth startups. | Mature, established businesses. |
Risk Level | High risk—startups may fail. | Lower risk—companies are already operational. |
Investment Size | Smaller investments: thousands to millions. | Larger investments: hundreds of millions+. |
Transaction type
Equity Stake | Minority ownership (<50%). | Majority or full ownership (>50%). |
Involvement | Strategic advice, mentorship, and networking. | Restructuring, cost-cutting, and active management. |
Exit Strategy | IPOs or acquisitions. | Sale to other firms or public listing. |
Which is right for your business?
Focus on Venture Capital if:
You are running an early-stage startup with high growth potential.
You need capital to scale your business and access expertise.
You’re willing to give up a small equity stake but want to maintain control of your company.
Focus on Private Equity if:
You run a mature business that needs significant restructuring, operational improvement, or a turnaround strategy.
You are comfortable with selling a majority or full stake in your company - i.e. you want to sell your company and cash-out.
You’re focused on boosting profitability and achieving a high valuation for an eventual sale.
Why Does the Difference Matter?
Understanding the differences between venture capital and private equity matters because:
Business Owners: Knowing where your company stands helps you attract the right type of investor.
Investors: It helps you align your risk appetite and return expectations with the right investment strategy.
Job Seekers: Knowing these terms helps you identify the culture and strategy of firms you might want to work for.
Final thoughts VC vs. PE basics
While both venture capital and private equity involve investing in businesses to achieve significant returns, the key differences lie in the type of companies they target, the level of risk they take, and their investment approach.
Venture Capital fuels innovation and growth for startups with potential.
Private Equity turns around established businesses to make them more profitable.
For business owners and investors alike, knowing where your goals align ensures that you make the right funding or investment decisions.
If you have any input or want to learn more, or need assistance in an investment process please reach out on kat@stgcommerciallaw.com
London, 1 July 2025 Author: Kat Strandberg