Private equity vs venture capital 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.

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.

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.

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.

For more information and a deep-dive into Private Equity vs Venture Capital, check out Kat's article here.