by Brian DeChesare Comments (26)

Private Equity vs. Venture Capital: What’s The Difference?

Private Equity vs Venture Capital

A long time ago, I wrote an article about private equity vs. venture capital – and many other sites not only copied the ideas, but also took direct quotes without attribution from the article.

But the joke is on them: because of this lack of critical thinking, much of their information is now wrong or incomplete.

Just as the distinction between public and private companies has blurred over time, private equity and venture capital have moved closer over the years.

And you need to understand that before you think about getting into or out of either industry:

Private Equity vs. Venture Capital: The Classical View

Both “private equity firms” and “venture capital firms” raise capital from outside investors, called Limited Partners (LPs) – pension funds, endowments, insurance firms, and high-net-worth individuals.

Then, both firms invest that capital in private companies or companies that become private and attempt to sell those investments at higher prices in the future.

Both firms charge their LPs a management fee of 1.5 – 2.0% of assets under management (the fee often scales down in later years) and “carried interest” of ~20% on profits from investments, assuming that the firm achieves a minimum return, called the “hurdle rate.”

(For more details, please see our private equity overview and the articles on private equity careers and venture capital careers).

But beyond these high-level similarities, almost everything else is different, at least in “the classical view” of these industries:

  • Company Types: PE firms invest in companies across all industries, while VCs focus on technology, biotech, and cleantech.
  • Percentage Acquired: Private equity firms do control investing, where they acquire a majority stake or 100% of companies, while VCs only acquire minority stakes.
  • Size: PE firms tend to do larger deals than VC firms because they acquire higher percentages of companies and focus on bigger, more mature companies.
  • Structure: VC firms use equity (i.e., the cash they’ve raised from outside investors) to make their investments, while PE firms use a combination of equity and debt.
  • Stage: PE firms acquire mature companies, while VCs invest in earlier-stage companies that are growing quickly or have the potential to grow quickly.
  • Risk: VCs expect that most of their portfolio companies will fail, but that if one company becomes the next Facebook, they can still earn great returns. PE firms can’t afford to take such risks because a single failed company could doom the fund.
  • Operational Focus: PE firms may become more involved with companies’ operations because they have greater ownership, and it’s “on them” if something goes wrong.
  • The Recruiting Process: Large PE firms follow a quick and highly structured “on-cycle” process, while smaller PE firms and most VC firms use “off-cycle” recruiting, which starts later and takes longer.
  • Work and Culture: Private equity is closer to the work and culture of investment banking, with long hours, a lot of coordination to get deals done, and significant technical analysis in Excel. Venture capital is more qualitative and involves more meetings/networking, and the hours and work environment are more relaxed.
  • Compensation: You’ll earn significantly more in private equity at all levels because fund sizes are bigger, meaning the management fees are higher. The Founders of huge PE firms like Blackstone and KKR might earn in the hundreds of millions USD each year, but that would be unheard of at any venture capital firm.
  • Exit Opportunities: Working in VC prepares you for other VC firms, startups, and operational roles; if you work in PE, you tend to continue in PE or move into other roles that involve working on deals.

Private Equity vs. Venture Capital: Why the Lines Have Blurred

First, many venture capital firms have moved up-market into growth equity and other later-stage investing.

For example, both Accel and Sequoia, known as some of the top U.S.-based VCs, have raised growth funds of close to $1 billion USD (or more) and now pursue deals worth tens of millions or even $100 million+ via those funds.

At the same time, many traditional private equity firms have moved down-market into growth equity (e.g., KKR has a “Next Generation Technology Fund”).

And then asset managers like T. Rowe Price and Fidelity have also begun investing in growth-stage companies.

So, saying that you “work in private equity” is too general a statement to be useful.

You have to explain your specific group, the strategies you pursue, and which of the firm’s funds you work in.

Finally, many long-held notions about how companies “should” raise capital are no longer true.

For example, venture lenders now provide debt financing to many pre-revenue startups.

It’s completely plausible for a tech startup to raise a combination of debt and equity as it goes from pre-revenue to public company.

And while traditional leveraged buyouts still use both debt and equity, the equity percentage has increased significantly: From less than 10% in the 1980s to 40-50% more recently.

(Sources: This report from Piper Jaffray for older data and PitchBook’s stats for post-financial-crisis deals).

As a result, private equity firms can’t rely 100% on “financial engineering” to generate returns (as articles about this topic often claim).

In light of these changes, we can check which of the generalizations above are still true and which qualify as “fake news”:

Difference #1: Company Types

VCs do tend to focus on technology and life sciences, and PE firms do tend to invest in a wider set of industries.

However, VCs don’t invest exclusively in those industries.

The data varies from year to year, but small percentages also go into sectors like media and entertainment, energy, and consumer products.

Also, there are some sectors that traditional PE firms avoid: For example, few firms acquire commercial banks because of regulatory constraints.

Difference #2: Percentage Acquired and Deal Size

The points about the typical percentages acquired by each firm type (100%, or a majority stake, for PE and minority stakes for VC) are true.

But the copycat articles on this topic all cite the figure of “$100 million to $10 billion” for private equity deal sizes and “under $10 million” for venture capital deal sizes.

You should take these figures with a grain of salt.

First off, the “under $10 million” deal size applies mostly to Series A rounds (i.e., the first significant capital a company raises, such as SAFE Notes in a Seed Round).

Once you get into Series B, C, and D, the deal sizes get far bigger.

Also, the average size depends on the industry: Cleantech and life sciences firms tend to raise bigger rounds than software startups because they need more capital.

On the private equity side, yes, the average leveraged buyout in a developed market is in the hundreds of millions USD, but plenty of deals are smaller than that.

Take a look at some of the charts from PitchBook to see – in the U.S., ~25% of PE deals each year are in the $25 – $100 million range. In other markets, that percentage is even higher because companies are smaller.

Finally, deals for over $10 billion have been rare in the decade following the 2008-2009 financial crisis; a “large deal” might be in the single-digit billions now.

Difference #3: Structure, Stage, and Risk

We covered this one above, but both firm types have begun doing growth-stage deals, which has changed the traditional risk/potential return profile.  So this one is more of a similarity than a difference.

Difference #4: Value Creation / Source of Returns

Nothing has changed for venture capital: returns still depend on growth and companies’ valuations increasing over time.

But things have been trending that way for many private equity firms as well.

When firms use 10% equity to acquire companies, “financial engineering” drives the returns – but when the average equity contribution is 40-50%, EBITDA growth becomes more important.

Difference #5: Operational Focus

Plenty of VC firms become more involved with a company’s operations than is commonly thought.

One example is Andreessen Horowitz, which has operational teams that assist executives with recruiting, sales, and marketing.

There are also plenty of private equity firms, especially in the middle market, that focus on operational improvements.

“Operational focus” is not a great way to differentiate PE and VC firms because it varies so much from firm to firm.

Difference #6: People and HR Strategy

At the junior levels, mid-sized and large PE firms do tend to hire mostly investment bankers, while VCs hire a more diverse mix.

But the lines start to blur when you move to the Partner or Managing Director level.

Many PE firms have “Operating Partners” with significant executive experience in a certain industry, and plenty of senior team members in venture capital enter the industry with banking/consulting backgrounds (especially in NY).

Difference #7: The Recruiting Process

There are “on-cycle” and “off-cycle” recruiting processes for junior-level roles.

The difference is that the hyper-accelerated, “on-cycle” recruiting processes apply primarily to bankers working at large banks in the U.S. who want to work at mid-sized-to-large PE firms.

In other regions and at smaller firms, “off-cycle processes” that start later and last longer are more common.

Most venture capital recruiting is also “off-cycle” – even some of the biggest firms take weeks or months to evaluate candidates.

PE and VC firms also look for different qualities in candidates: PE interviews are mostly about your prestige level, deal experience, and ability to crank through modeling tests.

Venture capital interviews are more qualitative, and interviewers care more about your ability to network, bring in deals, build rapport with founders, and understand markets.

For more, see our coverage of venture capital interview questions and the venture capital case study.

For more on the PE side, see coverage of private equity interviews and the LBO modeling test.

Difference #8: Work and Culture

It’s true that you do more technical work in private equity, you spend more time coordinating deals, and the work environment is a bit closer to banking.

However, one point that’s often overlooked is that you also spend more time monitoring portfolio companies – which many people view as “boring.”

Another often-overlooked point is that you’ll pass on 99% of deals in both industries.

So, the work and cultural differences may be slightly overstated because you’ll still spend a lot of time reviewing potential investments and turning down most of them in both fields.

Difference #9: Salary & Compensation

No private equity vs. venture capital comparison would be complete without discussing moolah.

There are three main components to compensation in both fields: base salaries, bonuses, and carried interest.

In general, you’ll earn significantly more across all three in private equity – though it also depends on the fund size.

For example, in the U.S., first-year Associates in private equity might earn between $200K and $300K total.

But VC firms might pay 30-50% less at that level (based on various compensation surveys).

To give some more context, in the infamous Ellen Pao vs. Kleiner Perkins trial, we learned that Junior Partners at KP earned a $400K base salary and a $160K bonus, while Senior Partners earned ~3-5x that (due to carried interest).

Those figures are from one of the largest and most successful venture capital firms, so they are not necessarily representative of others.

You might expect that Junior Partner-level pay ($400-$600K) at the mid-levels in private equity at a decent-sized fund.

And past the mid-levels, the ceiling goes much, much higher: people like Steve Schwarzman routinely earn hundreds of millions per year.

The “average” Partner or MD in private equity likely earns in the single-digit millions, but that’s highly variable and dependent on carried interest and firm size/structure.

Difference #10: Exit Opportunities

It’s true that your exit opportunities are more specialized with VC: for example, it’s difficult to go from VC to PE but easier to do the reverse.

But these difference may be slightly overstated.

At the junior levels, most people in both fields tend to stay in those fields, go back to business school, or join a portfolio company (or other normal company).

Hardly any post-banking hires go back into banking, few people join hedge funds, and even fewer people do something completely off the beaten path.

Promotion in both PE and VC is tricky because many pre-MBA Associates roles are not necessarily Partner-track.

Even if you’ve done well and you want to stay at your firm, you may have to move somewhere else or get an MBA to advance.

Private Equity vs. Venture Capital: Which One’s Right for You?

That is the wrong question.

The right question is: “Which one do *you* have a reasonable chance of getting into?”

If you’re in the U.S., you need to be at a bulge bracket or elite boutique in the right group (industry group, M&A, or LevFin), and you must have attended a top undergraduate institution and earned a high GPA there to maximize your chances of getting into private equity.

If you don’t meet some or all of those criteria, you’ll have to use off-cycle processes, network aggressively, and target smaller firms.

The compensation will be lower, but at least you’ll be in private equity.

In other regions, it’s a bit easier to get into the industry because the process is less structured, and there aren’t as many headhunters blocking your path.

On the other hand, you could get into venture capital from a much more “random” background: You don’t need experience at Goldman Sachs TMT, a 4.0 GPA from Princeton, and a Nobel Prize to win an offer.

I’ve seen people get in from consulting, smaller banks, finance/business roles at normal companies, and even engineering roles (upcoming interview!).

If you can network like a fiend, you have good knowledge of tech or healthcare, and you can prove that you can do the work, you have a pathway into VC.

And if you can’t decide, don’t worry: You could always just stay in banking.

If you enjoy suffering, that is.

Want More?

You might be interested in reading:

About the Author

Brian DeChesare is the Founder of Mergers & Inquisitions and Breaking Into Wall Street. In his spare time, he enjoys lifting weights, running, traveling, obsessively watching TV shows, and defeating Sauron.

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Read below or Add a comment

  1. Husain Karimi

    Hi Brian,

    I currently work in Investment Banking and received two job offers: one as a Business Analyst (Ventures) analyzing VC opportunities, and the other as an Investment Analyst at a large Insurance Firm. Which career is better in terms of versatility, growth, and progression?


    1. It depends completely on what you want to do in the future. For careers like VC or growth equity, the VC one is better. If you want to work in the public markets, i.e., not working on deals but following companies and recommending stocks, the insurance offer is better. You will probably earn less on the insurance side due to a different fee structure and bonus pool, but we have never covered that topic before, so I’m not sure of the exact differences.

  2. Hey Brian,
    I’m currently in IB and looking into breaking into Venture Capital but not sure where to start. I know that PE recruiting is much more structured but was wondering if there was anything similar to break into VC such as a traditional path via headhunters, for example?


      VC recruiting is less structured. There are headhunters at some of the larger firms, but it’s mostly a lot of networking.

  3. Hey Brian , hows it going, im based in London

    Was wondering if it’s possible to move from a reputable VC firm straight out of uni and then move to Growth Equity later on

    I know there’s a difference in skillset, but was wondering if the lines were blurry enough to be able to make the transition

    I understand some of the larger VC firms (sequioa etc) have GE divisions too

    Thanks in advance

    1. It’s possible, but probably not the easiest transition. It would be easier to move from PE to growth equity than to move from VC to growth equity because they’re always going to start by asking about your deal/modeling skills, which tend not to be great coming from most VC firms. It may be easier if you’re at a firm that does some later-stage deals.

  4. Hi Brian, how easy is it to move from growth equity to venture capital? Looking at team profiles on VCs’ websites, I can’t see any with growth equity experience, even though the two areas seem to have close links.

    1. Possible, but not the easiest thing because the skill sets are different, and VCs do not care about a lot of what you do in growth equity.

      1. Thanks Brian. Any info on how the skill sets differ, and what VCs don’t care about?

        1. VCs care less about accounting/finance knowledge and more about market/product knowledge.

  5. Ronak Shah

    Is there a possibility of getting into either of these after undergrad at a prestigious university? If so, would there be a future at the company without having to complete a MBA?

    Thanks for writing these articles.

  6. Hi Brian

    How often do you see former consultants in PE in London and NY? Other than Bain Capital that is? I’m currently a consultant but keen on going into energy PE after.

    1. It happens, but it is not that common unless you look at operationally-focused firms. Look at any mega-fund’s “Team” page and maybe ~10% of Associates will have a consulting background. Energy PE might be more feasible because they really only want people with energy banking (or sometimes consulting) experience.

  7. Brian, great read. Any insight on getting into a specific VC firm? Background is varied (former college instructor turned CPA and currently in Big 4 M&A diligence/consulting). VC firm is highly specialized in clean tech and environmentally conscious companies.

    1. We tend not to get as specific as individual firms. There are some articles on general VC and growth equity recruiting, which may be helpful (you can do a search). An upcoming article will also cover recruiting at life sciences VC firms.

  8. JackVale

    Hey Brian,

    Could you advise on what Banks allow penultimate internships for students graduating but pursuing masters degree? (which means still 1 more year till graduation)

    Example: Person X graduates from undergraduate studies in 2019 and decides to pursue 1 year finance master degree at Cambridge graduating in 2020. Is it possible to have internship during the 2019 summer?

    1. Most banks would allow that as long as you indicate that you’ll still be in school after the internship ends… so make sure the Master’s program is listed at the top of your resume and that you give a graduation date after the internship is over.

  9. Tech IB

    I’m 23, one year out of college with a biology degree and 3.83 GPA from a non-target school. I have experience in software development and I’d like to break into investment banking, specifically in technology.

    What would be the best way to break into investment banking, given my background, that gives me the best chance of success?

    1. It will be almost impossible without relevant internships or other finance experience. Your options are:

      1) Do a Master’s in Finance degree at a good school, get internships before/during the program, and enter at the Analyst level.

      2) Work for several years, apply to top MBA programs, do a pre-MBA internship in finance, and use that to get in.

  10. Hi Brian – Long time reader and big fan. You mentioned in the article “few people join hedge funds,” would you say this is because there are less hedge fund opportunities available, less people are interested in working at a hedge fund post 2008 or are there other reasons why?

    1. A combination of all of those. Hedge funds have had terrible performance post-2008, so many have been shutting down. There is a lot more uncertainty in your career as a result. Also, the “deal skill set” doesn’t translate as readily to hedge funds. Traders are better-equipped for many HF roles. We received quite a few questions about hedge funds 4-5 years ago, but not many lately (meanwhile, 99% of bankers still want to get into PE).

      1. Thank you, Brian. Appreciate the response.

  11. Brian,
    Most of the references to PE on your site are in terms of mega-funds/elite PE firms. When it comes to lesser known firms, do you lose a lot of the benefit in terms of making the switch from IB to PE? I assume this is definitely the case if you are moving from a BB to a lesser known PE, but what about from a MM to a lesser known PE? Is there a big drop-off in pay from top PE to lesser known? Thanks!

    1. The main downside is lower compensation at the smaller firms ($200-$250K rather than $300K for first-year Associates, with some variance depending on the region and firm type).

      But the hours may be better, and you may get more promotion opportunities. The work isn’t that different, but arguably you do more technical work at the biggest firms (though that’s heavily dependent on your group, market activity, etc.). Most people would say the work at a PE firm of any size is more interesting than what you do in IB.

      We tend to focus on the large firms and then explain how others differ from them because it’s easiest to start at the top and explain the differences from there.

      1. Gotcha, that’s very helpful. Impressed with the website, but even more impressed that you make the time to reply to everyone’s questions and comments. Makes this site something special.

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