Venture capital (VC) and private equity (PE) both invest in private companies using money raised from institutions and wealthy individuals, and both aim to sell their stakes later at a profit. But they invest in very different companies in very different ways. Venture capital backs young, fast-growing startups, usually taking minority stakes and accepting that most investments will fail. Private equity typically buys majority control of established, profitable businesses, often using debt, and aims to improve them. This guide explains the differences and where growth equity fits in between.
Venture capital buys minority stakes in young, high-growth startups and relies on a few big winners. Private equity usually buys control of mature, profitable companies, often using debt, and improves them before selling. Growth equity sits in between, making minority investments in established fast-growing companies. Both typically charge about 2% management fees and 20% carried interest.
The differences at a glance
| Venture capital | Private equity (buyouts) | |
|---|---|---|
| Company stage | Early to growth stage, often unprofitable | Mature, usually profitable |
| Ownership | Minority stakes | Usually majority or full control |
| Use of debt | Little or none | Significant (leveraged buyouts) |
| Return driver | A few big winners | Steady improvement across most deals |
| Failure rate | High; many investments return little | Lower; losses less common |
| Typical deal size | Thousands to hundreds of millions | Tens of millions to billions |
| Valuation basis | Growth potential, revenue multiples | Cash flow, EBITDA multiples |
How venture capital works
Venture capital firms invest in startups at stages from pre-seed and seed to Series A, B and beyond. They usually buy minority stakes, perhaps 10% to 25% in early rounds, and support founders with advice, hiring help and introductions. Because most startups fail or produce modest results, VC returns depend on a small number of huge successes, the companies that become worth billions. A single investment that returns 100 times the money can make an entire fund successful. That "power law" shapes VC behaviour: investors look for companies that could become enormous, even if the odds are low.
Our guides to what VCs look for in a Series A, Series A versus Series B and pre-seed versus seed funding explain the stages in detail.
How private equity works
Private equity buyout firms acquire established companies, often using a combination of their fund's equity and borrowed money. The debt is placed on the acquired company's balance sheet and repaid from its cash flows. PE firms then try to increase the company's value through operational improvements, cost cutting, better management, pricing changes, and acquisitions of smaller companies, a strategy explained in our guide to add-on acquisitions. After typically three to seven years, they sell the company to another buyer, another PE firm or the public markets. Leverage magnifies returns when things go well, and losses when they don't.
Growth equity: in between
Growth equity investors back companies that have strong revenue and are growing fast but don't need to be taken over. They usually take minority stakes, use little or no debt, and invest larger amounts than early VCs. Many of the large rounds in our database are effectively growth equity, such as Quantexa's Series F led by Teachers' Venture Growth, or KKR's investments in SmartHR and Musinsa. Firms like General Atlantic, TCV and Insight Partners are known for growth investing, and large PE firms such as KKR, Blackstone, Advent and Permira increasingly invest in fast-growing technology companies too. The line between VC, growth and PE has blurred.
Fees and how managers get paid
Both VC and PE funds typically charge an annual management fee, often around 2% of committed capital, plus carried interest, commonly 20% of profits above a hurdle. Funds last around ten years. Investors in these funds, called limited partners, include pension funds, endowments, sovereign wealth funds, insurers, family offices and wealthy individuals. Our guide to finding limited partners explains who they are.
Returns and risk
Top-performing VC funds can produce exceptional returns, but the spread between the best and the median fund is very wide, and many funds underperform public markets. PE returns tend to be more consistent across funds, though leverage adds risk, and returns have been squeezed in recent years by higher interest rates and high purchase prices. Both asset classes are illiquid: investors commit money for a decade with limited ability to sell, although secondaries provide some options.
Which should a founder or business owner approach?
- A young startup with a big vision and no profits should approach venture capital. PE firms rarely invest in unprofitable early companies.
- A fast-growing company with significant revenue can consider growth equity, which provides capital without requiring a sale of control.
- An established, profitable business whose owners want to sell or step back is a classic private equity target. Our guide to valuing a business with EBITDA multiples explains how PE firms price deals.
- A small business wanting to sell might also consider individual buyers or search funds.
Careers in VC and PE
The jobs differ too. Venture capitalists spend much of their time meeting founders, assessing markets and supporting portfolio companies; judgement about people and markets is central. Private equity professionals spend more time on financial modelling, due diligence, debt financing and operational improvement plans. PE recruiting traditionally draws heavily from investment banking, while VC hires from a broader mix of operators, founders and consultants.
Examples from our database
Most companies in our private company database are venture-backed, with investors such as Sequoia, Andreessen Horowitz, Accel and Index Ventures. Several have also attracted PE and growth investors as they matured: Blackstone led Cyera's Series F; KKR backed SmartHR and Musinsa; Advent co-led rounds in Shield AI and Quantum Systems; Silver Lake led Mirakl's Series E. That progression from VC to growth and PE investors is typical of companies as they scale.
How each makes decisions
Venture capitalists make decisions with limited information. A seed-stage company may have no revenue, so investors focus on the founders, the size of the market, early signs of customer demand and the product's potential. Partners often rely on judgement and pattern recognition, and many firms invest in dozens of companies per fund, knowing only a few will succeed. Our guide to researching VC firms before pitching explains how founders can find the right investors.
Private equity firms have much more information to work with. Target companies have years of financial records, customers and operations to examine. PE firms conduct detailed due diligence, often including a quality of earnings report, legal, tax and operational reviews, and build detailed financial models of how they will improve the business and repay debt. Each deal is larger, so each decision carries more weight, and firms typically complete fewer deals per fund.
How they add value
Venture capital firms add value mainly through advice, networks and credibility: helping founders hire senior leaders, introducing customers and later investors, and sitting on boards. They rarely run companies directly. Private equity firms, as controlling owners, can change management, restructure operations, invest in systems, pursue acquisitions and set strategy. Many large PE firms have operating teams of former executives who work directly with portfolio companies on pricing, procurement, technology and sales.
Deal sourcing
VC firms see thousands of startups a year, mostly through networks, founder referrals, accelerators and their own outreach. PE firms source deals through investment banks running sale processes, direct approaches to business owners, and relationships with advisers. Our guide to private equity deal sourcing strategies explains how PE firms find companies before they come to market, and our guide to proprietary deal flow covers why off-market deals are prized.
Exit routes
Both need exits to return money to their investors. For VC, the big returns come from IPOs and large acquisitions, and increasingly from secondary sales to later-stage investors. For PE, the most common exits are sales to strategic buyers or other PE firms, with IPOs for larger companies. In recent years, PE firms have also used continuation vehicles to hold onto their best assets longer, while giving investors the option to cash out. Exit timing strongly affects returns in both.
For founders and business owners, understanding these exit expectations helps when choosing investors, because a fund's timeline and return targets shape how it behaves on your board.
A quick way to remember the difference
Venture capital bets on what a company could become; private equity buys what a company already is and tries to make it better. Venture investors accept that most bets fail in exchange for the chance of an enormous win. Private equity investors expect most deals to work, using control, operational improvements and financial structure to earn steady returns. Growth equity combines elements of both: backing proven companies that are still growing fast, without taking control.
Frequently asked questions
What is the main difference between venture capital and private equity?
Venture capital buys minority stakes in young, high-growth startups; private equity usually buys control of mature, profitable companies, often using debt.
Which has higher returns, VC or PE?
Top VC funds can outperform, but VC returns vary widely. PE returns are typically more consistent across funds. Both depend heavily on manager quality.
Is growth equity venture capital or private equity?
It sits between them: minority investments in established, fast-growing companies, usually without much debt.
Do private equity firms invest in startups?
Traditionally rarely, but many large PE firms now run growth funds that invest in later-stage technology startups.
How do VC and PE firms make money?
Through management fees, typically around 2% a year, and carried interest, commonly 20% of profits above a hurdle.