At first glance, venture capital and private equity might seem quite similar: both involve firms with large pools of capital investing in private companies, aiming for substantial returns. However, there are fundamental differences between the two—mainly in the types of companies they invest in.
Venture Capital
A venture capital (VC) firm typically invests in the early stages of a company’s life, providing the critical funding needed to help it get started and, with hard work and a bit of luck, eventually grow.
VC firms are most commonly associated with tech-focused startups—perhaps because many of these companies have been backed by VCs. However, VC capital is also allocated to non-tech ventures, such as WeWork and Blue Bottle Coffee.
The money in a VC fund comes from its limited partners (LPs), which may include a network of wealthy individuals, their family offices, and institutional investors such as endowments, pension funds, mutual funds, and other asset management entities—depending on the size and structure of the fund.
Venture capital funds tend to pursue high-risk investments, distributing their capital across multiple companies. This diversification means that even if several startups fail, the fund as a whole may still yield strong returns—especially if one or two of its portfolio companies become massive successes.
As the VC landscape has become more competitive, firms often vie with one another to join funding rounds. Many attempt to differentiate themselves by offering a suite of services tailored to specific types of startups, which also helps justify taking significant equity stakes. VC firms may also take board seats in the companies they invest in. In theory, this gives them greater governance rights and influence over portfolio companies. However, the rise of dual-class share structures—favored by founders—and the recent shift toward founder-led control indicate that board members often have less power than they once did.
Private Equity
Private equity (PE) firms, by contrast, focus on investing in more mature companies that require capital infusion and operational restructuring in order to be sold later at a profit.
BlackRock, one of the largest asset managers, describes the process in three stages: buy, transform, and sell. A PE firm acquires a significant stake—usually much larger than a VC would—in a company, restructures or optimizes operations to boost revenue, and then exits profitably, often via an IPO.
Compared to venture capital, private equity typically involves lower risk, as PE firms invest in businesses that already have established operations—not just a pair of founders with laptops and a dream. According to Investopedia, PE firms also tend to acquire larger ownership stakes in their portfolio companies.
A good example of a company that has experienced both VC and PE investment is Ping Identity. Ping started with VC funding and raised $5.8 million in its Series A from General Catalyst in 2004. Between 2004 and 2014, the company raised a total of $128.3 million across multiple rounds.
In 2016, Ping was acquired by the private equity firm Vista Equity Partners for $600 million. Although details on Vista’s restructuring efforts remain unclear, Ping made a strong public debut just a few weeks ago. Its IPO raised $187.5 million before trading began, and its stock surged 25% on its first day. As of October 16, Ping had a market cap of approximately $1.25 billion.
Still, the line between venture capital and private equity is increasingly blurred.
For example, in September of this year, Postmates raised $225 million from the private equity firm GPI Capital. Prior to that, Postmates had already secured funding from well-known VC firms like Spark Capital and Founders Fund. It also received significant capital from BlackRock and Tiger Global Management.
The extent to which these two types of investors overlap in their portfolio companies is not entirely clear. What is clear, however, is that both are betting on the long-term profitability of emerging private enterprises.
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