Private Equity vs. Venture Capital: Understanding the Differences

Private equity and venture capital represent the two fundraising options that companies can choose to power their growth. While these funding options may appear similar, the differences between private equity vs. venture capital can impact the operation and running of your business. Private equity and venture capital firms are typically looking at different company profiles to invest in, taking a certain equity percentage and investing different amounts of capital.

A specialist private equity or venture capital CFO will navigate your company through the fundraising process, determining which private funding option is best suited for your organisation. Securing fundraising is crucial for companies who want to grow but don’t have the liquidity to internally fund it. Debt financing for new ventures is incredibly tricky, leading most start-ups and scaling companies to turn to private fundraising.

FD Capital is the UK’s leading financial recruitment agency with a specialist private equity team and a portfolio of CFOs and FDs with extensive experience working in venture capital. Invest in your company today by contacting our team at recruitment@fdcapital.co.uk to recruit a specialist fundraising CFO or FD.

Private Equity and Venture Capital Are Not the Same

Private equity and venture capital offer alternatives to traditional financial institutions, particularly for high-risk and innovative companies. While private equity firms invest across industries, venture capital typically focuses on technology, but it is not limited to this.

The key difference between private equity and venture capital is that the former deals with cash and debt in their investment arrangement, while venture capital focuses solely on equity. Your fundraising strategy should determine whether you want to target private equity or venture capital firms early on.

Private Equity

Private equity is the shares that represent the ownership or interest in a company that is not publicly listed or traded. High-net-worth individuals and specialist firms use private equity as a source of private investment in companies. Occasionally, these investors may strategically buy shares to delist a public company by taking it private.

The world of private equity investment is dominated by large firms and portfolios, such as pension funds and accredited investor-backed PE houses. Private equity investors are typically experts in their chosen niche, identifying mature companies that have already experienced growth or those that are lacking in operational effectiveness but have the potential to be turned around.

Companies can utilise private equity investment to fund new technology, equipment, pursue acquisitions and growth opportunities, or support its cash flow.

Private Equity Back Companies and PE Firms

Companies across virtually every industry have received backing from high-profile private equity firms. Examples of companies that have received private equity funding include:

• Gymshark – fitness apparel and accessories brand.
• Infoblox – network protection security software.
• LogicMonitor – a SaaS performance monitoring system that is cloud-based and automated.
• Marketo – marketing automation software company.

Private equity firms operate across the UK and internationally, many of them choosing to specialise in industry niches. Examples of private equity firms include:

• Audax Group – invests in software, infrastructure, and media.
• Blackstone Group – invests in public debt, secondary funds, and real estate.
• Carlyle Group – invests in retail, transportation, and commercial products.
• Kohlberg Kravis Roberts – invests in business products, energy, and financial services.

Venture Capital

Venture capital is a fundraising option typically geared towards start-ups and small businesses seeking who have been identified as having a high-growth potential with above-average returns.

These companies are often at the forefront of industry change or are establishing new niches. Venture capital is dominated by specialist funds, investment banks, and high-net-worth-individuals. These individuals and firms often provide managerial and technical assistance as part of their investment.

Venture capital is technically a sub-sector within private equity as they also invest in private companies. The difference lies in the investing philosophy, exit strategy, and the companies they seek to engage with. Venture capital investors focus on companies with high-growth potential early in their life cycle.

Start-up companies typically target venture capital as these investors are willing to take a higher risk for a company that has the potential to provide above-average returns. Venture capital is a popular fundraising option for start-ups within the first two years of their life cycle. These companies will usually not have access to funding through debt instruments, capital markets, or bank loans.

Investing in companies so early in their life cycle enables venture capitalists to obtain equity and a voice in the company’s decision-making process.

Venture Capital Back Companies and VC Firms

Companies within innovative industries, such as biotech and social media, are key targets for venture capitalists. Examples of companies that have received venture capital funding include:

• SpaceX – Elon Musk’s company that designs, manufactures, and launches rockets and spacecraft.
• Stripe – a suite of APIs powering online payment processing and commerce solutions.
• Pinterest – image sharing and social media service that acts as a visual bookmarking platform.
• LinkedIn – recruitment-focused social media networking site.

Venture capital firms operate across the UK and internationally, many of them choosing to specialise in industry niches. Examples of private equity firms include:

• Accel – works with start-ups in seed, early, and growth-stage investments.
• Greylock Partners – one of the oldest venture capital firms, focusing on early-stage companies in consumer and enterprise software.
• Sequoia Capital – specialises in seed stage, early stage, and growth stage investments for private companies across the technology sectors.
• Index Ventures – invests in technology-enabled companies with a focus on AI, gaming, fintech, mobility, e-commerce, and security.

Types of Venture Capital Funding

Venture capital funding is typically sought by start-ups in their early stages with VC usually offering three types of early-stage funding:

• Pre-seed:

Pre-seed funding is designed for companies that have an idea but need capital to pursue a full business plan or produce a prototype product. Companies must show potential VC investors that there is a market for their product or service.

• Seed:

Companies that are viable but provide further capital to get into their markets. These companies must show potential investors what their investment could do for its sale and revenue growth.

• Series A and Series B Funding:

Series A funding is for companies that have a revenue flow, demonstrating that the product works in its market, but needs investment to employ more people and develop its sales and marketing strategy.

Series B funding is typically sought by companies seeking to launch a new product or enter new territories with an existing product.

Private Equity vs. Venture Capital

Private equity investors focus on established companies that can showcase a track record of revenue success or potential with a growth or restructuring plan. These companies typically invest through a buyout, purchasing a controlling stake in the company. Alternatively, a PE firm may choose to use a growth equity investment strategy where they invest in the company to promote growth and expansion.

Private equity firms are focused on buying mature companies with an established presence. However, they’re also interested in companies that are experiencing difficulties, whether through cash flow management or leadership problems. Private equity investors will take an active role in helping the company streamline and change its strategy to boost its revenue or restructure its finances.

By comparison, venture capital investors focus on early-stage companies that are not yet profitable and cannot point to any current revenue success. These investors provide capital in exchange for an equity stake. Venture capitalists take an active role in developing the company by working with its management team. Start-ups with high-growth potential are at the top of the venture capital shopping list.

Private equity firms will typically take controlling interests in the company they’re investing in. By comparison, venture capital firms usually invest 50% or less of the company’s equity as part of their risk management strategy, reflecting the fact that they tend to invest in a higher number of companies than PE firms.

Most private equity firms invest ten times more than their venture capital companies, reflecting their investing philosophy. Private equity firms are more concentrated in their focus on a smaller number of established companies. By comparison, venture capitalists firms invest smaller amounts in a larger number of companies to balance the risk of start-ups failing to get off the ground.

How Much Do Private Equity vs. Venture Capital Invest?

Venture capitalist firms will invest less than their private equity counterparts, who tend to be more selective about their companies. VC firms will invest in more companies as they try to balance their ‘winners’ against their ‘losers’ as part of their risk management strategy.

Private equity investors typically are conducted as a buyout, while venture capitalists invest in exchange for an equity stake in the company. One area where you can see a difference in the investing philosophy is the fact that venture capitalists are investing in start-ups that often have novel ideas, usually with a management team already in place, but without the track record a private equity company searches for.

Private equity companies instead want to step in and improve the operations and scale of a company that is already or has previously been profitable.

Private Equity vs. Venture Capital: Exit Strategy

Another vital difference between private equity and venture capital is their exit strategies. Venture capitalists typically look at an exit as early as three years post-investment, whereas private equity firms have a five to seven-year investment timeline as they’re seeking to add long-term value through expansion and enhanced operational strategies.

Venture capitalists, many of whom focus on tech companies, are trying to stay ahead of the curve and innovation by betting on companies in their early stages. Tech start-ups can quickly burn through cash in their bid to break into a market or while going through development.

Private equity firms typically take a majority stake in the company ownership, making them more directly involved in its operations than venture capitalists. By comparison, venture capitalists have more of a mentoring role by providing resources and guidance to companies. However, they invest in multiple companies and don’t have the time for the more hands-on approach of private equity investors.

We are seeing a slight increase in the duration of private equity investments with the average holding moving from 3-5 years to 6 years. This increase is largely due to a lack of exit opportunities and increasing competition within the private equity market. Venture capitalists will typically aim to exit their investment through an IPO within 5 years, but some venture capital funds are designed as a more long-term investment.

The Changing Role of Private Equity and Venture Capital CFOs

While the role of CFO has evolved in recent years, CFOs at private equity-backed companies are facing additional challenges and added responsibilities as industries become more regulated. Investors now expect CFOs to provide more data insights and financial transparency throughout the investment agreement, as well as information on environmental, social, and governance (ESG).

CFOs are expected to be able to speak about the company’s operational decisions, as well as its financial strategy. Private equity investors are expecting CFOs to be able to prove their company’s financial resilience through business continuity planning and investing in relevant technology, particularly cybersecurity following the remote working revolution. Risk management is therefore becoming an even greater responsibility for CFOs.

The valuation process is another way that the role of CFO is changing within private equity-backed companies. Valuations were previously compliance-driven, but more regulation means that CFOs must maintain oversight throughout every stage of the deal and its eventual exit strategy to ensure that correct procedures are followed to prevent overstating the company’s valuation.

Recruiting a Private Equity or Venture Capital CFO

Working with a specialist recruitment agency is the most effective way to identify a financial executive with the private equity skills and experience that match your company’s needs, whether they’re seeking seed funding or exploring private equity investments.

Our team offers both traditional recruitment services and CFO headhunting services, providing a 360-degree approach to tailor the recruitment process to suit your goals. Our hands-on approach to recruitment starts by identifying the specific needs of your company and whether you need an industry specialist to fill a skills gap or a CFO with previous venture capital experience.

FD Capital connects companies with private equity house CFOs throughout the UK and beyond. Recruit a CFO with private equity experience by contacting

our team at recruitment@fdcapital.co.uk or 020 3287 9501.

Adrian Lawrence

Adrian Lawrence FCA with over 25 years of experience as a finance leader and a Chartered Accountant,  BSc graduate from Queen Mary College, University of London.

I help my clients achieve their growth and success goals by delivering value and results in areas such as Financial Modelling, Finance Raising, M&A, Due Diligence, cash flow management, and reporting. I am passionate about supporting SMEs and entrepreneurs with reliable and professional Chief Financial Officer or Finance Director services.