Venture capital and private equity are two forms of private investment, so you may hear these terms used interchangeably. Both conduct due diligence on prospects, and they ultimately invest money in companies in hopes of generating financial returns. However, they have different investment criteria: Venture capital is more likely to invest in early stage, high-potential ideas, while private equity often seeks to make mature businesses more efficient and profitable.
“Venture capital is generally seen as funding hopes and dreams, and bringing possibilities to light—whereas private equity is known more for operational improvements and financial engineering,” says Michael Duda, cofounder and managing partner of Bullish Inc., a venture capital firm that has invested in companies like Warby Parker, Peloton, Harry’s, and Bandit Running.
What is venture capital?
Venture capital (VC) is a type of funding that investors provide to privately held companies, usually in exchange for equity. Often these investors are venture firms, but they can also be individual venture capitalists. In addition to providing funds, many VCs also play an advisory role, lending their technical or managerial expertise and helping guide the company as it grows.
Most venture capital money comes from entities called limited partners (LPs), who are the main shareholders of the fund. LPs are often institutional investors like pension funds and college endowments, as well as investment banks, financial institutions, individual investors, and family offices. They provide the capital, and a general partner (GP) from the VC firm invests that money and manages the fund’s operations.
Venture capital firms invest in young startup companies that they believe have rapid growth potential. They’re willing to take a chance on businesses with unproven concepts, often funding them at a stage when they have only an initial concept or product prototype. It’s an all-or-nothing approach, with high risk and high chance of failure—but very high returns when the bet pays off. Though venture funding has permeated pop culture, very few US companies actually raise money this way.
What is private equity?
Private equity (PE) firms are fund management companies that invest in established private or public companies. They often take a majority stake or buy the entire company—with the goal of improving the company’s performance and eventually selling it for a profit. Similarly to venture capital funds, PE firms invest capital from multiple sources, including large institutional investors like pension funds, college endowments, and insurance companies, as well as wealthy investors.
PE firms tend to seek out a more established company that has a proven model but could be operated more efficiently. In this buy-improve-and-sell strategy, PE firms often purchase companies and work with the managers to streamline operations, reduce costs, and boost profitability. Once the PE firm has increased the company’s value, it typically sells it to another PE firm, to a larger company, or through an initial public offering (IPO).
Private equity vs. venture capital: What are the differences?
Life cycle stage
This is perhaps the defining difference between private equity and venture capital. VC firms often invest much earlier in a company’s life cycle: Many seek emerging companies that may have only a concept or prototype but just might be a roaring success in the future. VC firms also may invest over multiple stages of a company’s development, from inception to the lead-up to an IPO.
Private equity funds invest growth capital in established businesses, with an eye for scaling up or improving operational efficiency.
“Private equity looks to identify one of two situations,” Michael says. “In the first, a company needs more resources to go from X to multiple times X—like a regional sandwich shop has 10 great stores, and with our money, we’ll make it 50 great stores. In the second, it’s about a business that could succeed much more if we can create some operational efficiencies.”
Risk profile
The amount of risk is another important quality, and it goes hand-in-hand with the life cycle stage at which a firm invests. VC is an inherently high-risk investment process that makes big bets on early, unproven ideas. As a result, by some estimates 75% or more of all VC-backed companies fail. But the winning bets often pay off big—providing enormous returns that more than make up for losses from other portfolio companies. This is called the “power law,” in which a handful of successful investments prop up the entire fund.
PE is lower risk compared to venture capital because private equity firms invest much later in a company’s lifecycle. They put investment capital into an established company, which they try to improve and sell. Because the risk is lower, so is the rate of return on the capital invested.
“Venture capital is high-risk, high-reward, whereas private equity doesn’t lose money as often but also doesn’t usually make as much money on the multiple when the investment works out,” Michael says. “That’s OK, and that’s why they’re different asset classes. There are places in the life cycle for both.”
Investors
The backgrounds of the people within VC and PE tend to differ somewhat, although this is not a concrete rule—and some firms do both VC and PE. Common VC backgrounds include investment banking, management consulting, hands-on experience operating startups, or technology acumen.
“Venture capital investors tend to be finance-oriented people who can do financial modeling, look for ideas they like in a company’s plans, and get excited about the potential of those ideas,” Michael says. “But there are always outliers, including myself; I came from a marketing and advertising background.”
The private equity world also includes people with investment banking and consulting backgrounds, but many firms also like to see accounting, economics, analysis, and deal-making experience. Private equity funds that focus on a particular segment may also hire operating partners with extensive experience in that sector, such as industrials or consumer goods.
Exit timeline
Venture capital deals typically have a longer timeline than private equity to cash in on their investment—an event known as an exit. The exit is the point at which the business is sold or issues shares on a public stock exchange in an initial public offering (IPO). In either case, this is typically the moment when investors receive their returns.
Speaking broadly: Because VC deals happen early in the business’s life cycle, the exit typically occurs after about five to 10 years (or more for large exits like an IPO). Investors are willing to accept a longer journey for companies that could have significant growth potential, and they take a more patient and risk-tolerant approach to business development.
PE tends to make rapid operational improvements and seek a shorter turnaround for a payout on their initial investment. Historically, this timeline is about three to seven years, though a 2025 McKinsey study shows this is trending longer: The consulting firm found average PE hold time was 6.7 years, compared to the long-term average of 5.7 years during the past two decades.
Private equity vs. venture capital FAQ
Is private equity the same as VC?
No. Both invest money in private businesses, but venture capital funds generally invest in early growth stage companies, while private equity investors often seek to scale and improve more mature companies before selling them.
What is better, private equity or venture capital?
Neither is better or worse, but one will be a better fit for a given company depending on its life cycle stage. New startups raising capital look to VCs, while more established companies could be a better fit for private equity deals.
Which is riskier, private equity or VC?
Both private equity firms and VC firms take significant risks with their investments. But because VC funding happens very early, when a company is in its infancy, it’s far riskier: By some estimates 75% or more of VC-backed companies don’t return money to investors providing funds.
