Private equity and venture capital refer to different ways that investors can provide companies with private funding, at different stages, often in exchange for an equity stake. Generally speaking, venture capital, or VC, focuses on growth-oriented startups; private equity (PE) is used to help mature companies expand, execute a turnaround, or restructure.
Technically, venture capital is considered a subset of private equity funding strategies, as both rely on privately held funds. But PE indicates a higher level of investment in fewer companies; VC firms or individuals typically invest smaller amounts in multiple startups.
Until fairly recently, only accredited investors could access private equity funds, but thanks to new rules and standards being discussed within the federal government and the Securities and Exchange Commission (SEC) since 2025, it’s easier for retail investors and those who don’t meet the accreditation requirements to access new private equity vehicles, e.g., retail private funds.
Table of Contents
Key Points
• Private equity (PE) and venture capital (VC) are two ways that individuals, funds, or companies invest in other companies in exchange for equity.
• PE firms often invest in a small number of entities, or even just one company at a time, usually a mature company.
• Venture capital investors generally invest in multiple startups at once.
• PE and VC are both considered high-risk strategies, but VC investing tends to be higher risk owing to the high failure rate of many startups.
• While many PE and VC funds are privately held, there are some regulatory changes that may enable retail investors to access private equity and VC funds.
What Is Private Equity (PE)?
Private equity refers to investing in companies that are generally not publicly traded. Unlike investing in public securities (such as by purchasing index funds or investing in stocks of companies listed on a public stock exchange), PE firms pool money from many investors, and invest in privately held companies in exchange for a share of ownership.
While you might not think of private companies as having shares of stock in the same way that publicly traded companies do, most incorporated companies do have stock. A small company might only have a hundred or even fewer shares, all owned by the initial founders of the company.
A private company that is more established, on the other hand, might have hundreds of thousands or even millions of shares owned by a wide variety of people. The stock of private companies might be owned by the founders, employees or other private equity investors.
While public company shares can be traded through online investing, or a traditional brokerage, private company shares are exchanged privately.
What Is Venture Capital (VC)?
Venture capital is a subset of PE investing. VC refers to investors and money that is invested into early-stage companies in the hope that they will grow rapidly, and generate an above-average return on investment — often via an acquisition or by going public. VC investing usually refers to direct financing, but the investment can also happen through managerial or technical expertise.
Venture capital funds are often invested through a series of investing rounds. Initially there is an angel investor round or “seed” round, and then VC funding is conducted in series A, B, C (and further) rounds. In each round, companies receive funding from VC investors in exchange for a percentage of the company’s stock, at an agreed-upon valuation.
Generally, the earlier the round of VC investment, the lower the valuation. This allows the earliest investors to potentially have the highest return on investment if the company has a profitable exit, since they also carry the largest amount of risk.
Venture capital and private equity are examples of alternative investments because they fall outside the realm of conventional securities.
5 Key Differences Between PE and VC
While private equity and venture capital both refer to companies or funds that invest in privately held or startup companies in exchange for an equity stake, there are a few key differences to keep in mind.
1. Investment Stage and Company Maturity
Generally speaking, VC investors look for startup or early stage companies that need capital to grow. VC investors may have a portfolio of several companies they’ve invested in financially; in addition VCs may offer business guidance or technical backing.
By contrast, PE investors tend to put more capital into a smaller number of mature companies. Private equity investment may be used to execute a turnaround or a restructuring, for example, to help a company become profitable.
2. Ownership Stake and Control
Both PE and VC investors invest capital in different companies in exchange for equity, i.e., an ownership stake, and some degree of control over business operations. But private equity firms typically have deeper pockets, with substantial amounts of capital pooled from various high-net worth individuals and institutional investors. As a result PE firms may buy 100% ownership in a mature company.
For example, private equity firms may gain control of a public company in order to take it private and employ new business strategies that, ideally, are more profitable.
Venture capitalists typically own a smaller stake in several startups or small businesses. VCs are betting that a small business may achieve breakout success with an innovation or disruption that could lead to outsize growth.
3. Capital Injection and Use of Funds
The goal of PE investment is to turn around an existing business, with the aim of achieving a path to profitability after a period of years. PE firms typically don’t seek long-term ownership. They may use a combination of debt and cash, typically $100 million and up.
VC investors, by contrast, provide funding in exchange for an equity stake — even though there is a high risk that they won’t see a return (usually $10 million or less). Most companies that VCs invest in are at a very early or startup stage. The goal of VC investors is to get a startup to the point where it might be acquired by another established company.
4. Risk Profile and Return Expectations
Both strategies include the risk of investing funds in a particular company with the hope that the organization will be able to grow, go public, be acquired, or find another avenue to profitability. But there are no guarantees.
Generally speaking, VC investing tends to have a higher risk profile because a VC investor’s money is distributed among several hopeful startups, and the risk of losing some or all of your capital is significant. But if a startup succeeds, the potential for returns can also be quite high.
PE investing is also considered risky, but because mature companies are the target, the risk of total loss is lower than it is for many VCs. Also, if a company fails there may be assets that can be liquidated.
5. Exit Strategies
Private equity exit strategies tend to differ from VC exit strategies, which makes sense given the different goals of private equity vs. venture capital investors.
For example, VC investing is geared toward funding early stage companies with high-growth potential. Thus, VCs tend to favor acquisitions by larger companies that are aligned with the startup (and can benefit from their innovation or disruption). Going public via an IPO is another possible exit strategy, although IPOs can be complicated.
Private equity firms, by contrast, focus on rehabilitating larger, more mature companies that already have a market presence. Thus, the endgame for PE investors tends to be mergers and acquisitions, IPOs, or acquisitions by other PE firms — capitalizing on the company’s existing value.
Recommended: What Is Diversification, Why Does It Matter?
Differences Between PE and VC Investing
| Private Equity | Venture Capital |
|---|---|
| Invest in established companies | Invest in early-stage companies and/or startups |
| Often purchase entire companies and work to improve their profitability | Obtain a partial equity stake |
| Generally invest more money but focus on fewer companies | Firms tend to invest in more companies, with lower amounts |
What Is Private Capital?
Private capital is an umbrella term for several kinds of investments, including private equity and venture capital, as well as private real estate and private debt.
Venture capital and private equity funds allow investors to access fast-growing or restructured private companies that may have the potential for bigger returns versus some publicly traded companies.
Private debt involves investing in the debt used to finance private companies. Lastly, private real estate offers investors ownership of both equity and debt interests in various real estate properties, which can offer potential for both growth and income.
The possible advantage of private capital investments is that they are considered alternative investments, and thus may offer some diversification. For example, if steady income is your goal, you might consider fixed income securities such as bonds (or dividend-paying stocks) — or you could invest in private debt or private real estate with the same goal.
Pros and Cons of Private Investing
When you compare private equity vs. venture capital investing, there are a few pros and cons to consider.
One potential advantage of investing in private equity is that private equity firms often concentrate their money in a small number of firms. This might allow the private equity investors to concentrate their expertise in order to improve the profitability of those companies.
However, some might consider this a disadvantage, since you might lose some or most of your investment if the company is not able to turn things around.
Similarly, venture capital investors typically invest in a larger number of startups and early-stage companies. One advantage of investing in this manner is that you may see outsized returns if one company succeeds.
However, a related disadvantage is that many companies in these early stages do not succeed, potentially wiping out your entire investment.
In that sense, it’s a high-risk, high-potential-reward area of investment.
Common Myths About Private Markets
One common misconception about private equity vs. venture capital is that only high net-worth individuals can invest in these fields. While it is true that most PE and VC investors are those with access to significant amounts of capital, there are also a growing number of private equity funds that retail investors can access, such as business development companies (BDCs) and closed-end funds (CEFs).
In addition, proposed regulatory changes to investor accreditation rules may allow more individual investors to take part in investing in venture capital or private equity.
The Takeaway
Private equity and venture capital funds are two different ways that companies invest in other companies. While they share similarities, there are also some key differences. One big difference is that generally, private equity funds invest more money in fewer companies while venture capital funds often invest (relatively) smaller sums of money in many companies.
While most private equity and venture capital funds are privately held, there are some closed-end funds (CEFs) that are publicly traded and open to retail investors.
Ready to expand your portfolio's growth potential? Alternative investments, traditionally available to high-net-worth individuals, are accessible to everyday investors on SoFi's easy-to-use platform. Investments in commodities, real estate, venture capital, and more are now within reach. Alternative investments can be high risk, so it's important to consider your portfolio goals and risk tolerance to determine if they're right for you.
FAQ
Is private equity better than venture capital?
Private equity (PE) and venture capital (VC) are two forms of investing in other companies, and when comparing the difference between VC and PE, it isn’t really the case that one is better than the other. Instead, it will depend on your own specific financial situation and/or risk tolerance. You can also consider alternative investments to both private equity and venture capital.
Which is the riskier option?
Both private equity and venture capital carry some level of risk. In one manner of speaking, venture capital is riskier, since many of the early-stage companies that they invest in will not succeed. However, most venture capital funds mitigate that risk by investing in many different companies. One successful investment may pay off the losses of tens or even hundreds of unsuccessful venture capital investments.
Are there private equity or venture capital funds available to buy?
Many private equity and venture capital firms are targeted towards investors with significant assets, i.e., accredited investors. However, there are some funds that are publicly traded and thus available to individual investors. Make sure that you do research before investing in any one particular private equity or venture capital fund.
What is the difference between private equity and angel investing?
Angel investing is when investors (often wealthy individuals) provide seed or startup capital for a new business. Angel investing is a very early stage, sometimes the very first stage of a startup’s fundraising journey. Private equity firms target mature companies with a market presence, cashflow, and other fundamentals, and use a full or partial takeover strategy to expand or restructure that company.
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