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

In India, startups like Flipkart, Paytm, and Zomato grew with the help of external funding at different stages. While both venture capital and private equity involve investing in businesses, they differ in how they operate, when they invest, and their overall approach.

Venture capital typically backs young, high-risk startups with strong growth potential, whereas private equity usually invests in mature companies looking to expand or restructure with significant funding. Understanding these differences reveals how companies grow and how investors earn.

If you want a clear comparison of private equity and venture capital, including meaning, investment stages, risk, returns, control, and real-world examples, you’re in the right place. This article covers all the key differences between private equity and venture capital.

Table of Contents:

• What is Private Equity?
• What is Venture Capital?
• Private Equity vs Venture Capital: Key Differences
• How Private Equity Works
• How Venture Capital Works
• How PE Firms Generate Returns
• How VC Firms Generate Returns
• Recent Trends: Private Equity vs. Venture Capital in India
• Private Equity vs Venture Capital: What’s Right For Your Business
• Similarities Between Private Equity And Venture Capital
• Can You Move From Private Equity to Venture Capital?
• Conclusion

What is Private Equity?

Private Equity (PE) refers to investing in companies that are not listed on public stock exchanges. Private equity firms often target companies that need improvement, restructuring, or growth potential. They provide capital, expertise, and guidance to help these companies succeed. 

Generally, PE firms purchase a large portion of equity and take charge of the company. They change strategies, make operations better, or reduce expenses. PE firms raise capital from institutional investors such as pension funds, insurance firms, and endowments. They invest this capital and, in many cases, borrow funds to purchase companies either all or with a majority stake.

Private equity is applied to mature, profitable companies. It is unlike venture capital, which provides investment to high-growth, risky start-up companies at an early stage.

What is Venture Capital?

Venture capital is funding for firms that are in their early phase but are high-growth firms. These enterprises are typically owner-managed. They often fail to generate consistent income and cannot move funds via the open markets and conventional credit.

VC firms make investments in exchange for an equity stake. They aim to fund new startups that aim for maximum returns in the long term. They usually invest in such companies and, along with the capital, they also offer strategic counsel, mentorship, as well as connect such firms to the industry.

Many successful Indian startups have received both Venture Capital (VC) and Private Equity (PE) funding at different stages of their growth. Some of the companies are Flipkart, Paytm, Ola, Zomato, BYJU’s, Policy Bazaar, and many more. 

Private Equity vs Venture Capital: Key Differences

The table below shows a quick side-by-side comparison of private equity and venture capital: 

Here are the detailed differences between the two.

1. Investment Stage

• Private Equity: Invests in established companies in India, with predictable profits, and is essentially willing to promote growth or restructuring.
• Venture Capital: Invests in Indian start-up firms, almost always in emerging sectors that have high growth and potential, yet have a short record of revenues.

2. Investment Size

• Private Equity: They usually invest huge amounts, hundreds to thousands of crores of rupees.
• Venture Capital: VCs invest smaller sums, usually some lakhs to a few crores, according to the level of startups.

3. Industry Focus

• Private Equity: Investments made in different industries in India, including manufacturing, infrastructure, FMCG, and services.
• Venture Capital: Specializes in industries such as fintech, technology, AI, health tech, SaaS, and e-commerce startups.

4. Risk Profile

• Private Equity: This form implies less risk since it is invested in profitable companies.
• Venture Capital: There is increased exposure to risk whereby money is invested in untested enterprises, but the rewards can be lucrative.

5. Investment Horizon

• Private Equity: Their typical investment horizon is 3 to 5 years, after which they intend to liquidate through sales and IPOs.
• Venture Capital: Long-term investment between 7 to 10 years to enable the growth of startups.

6. Ownership & Control

• Private Equity: Buys majority stakes, at times with direct control over the operations of a firm.
• Venture Capital: They hold minority stakes, backing conceptual ideas, while founders keep operational control.

7. Exit Strategy

• Private Equity: Exit is through IPOs in Indian stock markets, strategic sales, or secondary buyouts.
• Venture Capital: Exits generally happen through acquisition, by other Indian or foreign established companies, or an IPO.

8. Expected Returns

• Private Equity: It pursues consistent returns and aims at increasing business performance and expanding operations.
• Venture Capital: Seeks profits derived from the start-up of several successful startups, but many may fail.

9. Type of Financing

• Private Equity: Financing through buyouts (LBOs), growth capital, and restructuring
• Venture Capital: Equity type of financing, primarily in early and growth phases.

10. Management Involvement

• Private Equity: Takes an active role, often involving direct control.
• Venture Capital: Simply offers advice and mentoring, usually not interfering with the day-to-day running.

The venture capitalists invest in startups at early stages, where there’s high growth potential but limited history. VC firms tend to take minority stakes and assist founders in business growth. On the other hand, PE firms often gain control or significant influence over management decisions. Both consist of investing in the companies; however, strategies, riskiness, and the type of business that is to be targeted differ entirely.

How Private Equity Works

Private equity firms raise funds, invest in companies, improve them, and later sell their stake for profit. Let’s break down the working process in detail:

1. Raising Capital

Institutional investors add money to PE firms. Such investors invest capital in a PE fund, with a defined life cycle and specific investment strategy.

The diagram below shows how capital flows into a private equity fund and how the fund is structured between the PE firm, investors, and the portfolio companies:

2. Acquiring Companies

This capital, usually combined with leverage or borrowed capital, is used by the fund to purchase the ownership of private companies or remove some companies from their status as publicly traded ones. These tend to have established businesses with stable cash flows.

3. Improving Performance

Upon acquisition, the PE firm works to improve the acquired company. This can include cost reduction, business reorganization, management enhancement, or entering other markets.

4. Exiting the Investment

After holding the company for 3 to 5 years, the PE firm exits through a sale, IPO, or a secondary buyout. The goal is to sell at a higher valuation than the purchase price.

Example of PE: KKR acquired a stake in Max Healthcare, helping restructure operations and bring in professional management.

How Venture Capital Works

Venture capital raises capital, invests in startups, supports growth, and later exits the investment. Let’s understand the working process in detail:

1. Raising Capital

The institutional investors and high-net-worth individuals invest with venture capital firms. The capital raised is pooled into a fund that invests in a portfolio of early-stage, high-growth startups.

Venture Capital firms fund startups in exchange for equity. They act as intermediaries between ambitious founders and high-risk investors. The goal is to grow the startup fast and exit via IPO or acquisition.

2. Investing in Startups

VCs usually support enterprises found in high-growth industries such as tech, biotech, or software. These may be young companies with no revenue and profitability yet, but they have high potential to grow fast.

3. Supporting Growth

Although the venture capitalists are not actually running the business, they usually sit on the board and assist in advising, employees, contacts, or future financing. They remain involved at a strategic level, usually through board roles.

4. Exiting the Investment

The VCs seek to get their exits in 5 to 10 years by way of either an IPO, an acquisition, or a second sale. The exit will vary depending on the degree of growth and the value of the company.

Example of a VC deal: Before being acquired by Walmart, Flipkart received early funding from Accel Partners.

How PE Firms Generate Returns

Returns are generated by improving the financial performance and valuation of the company. The major role is played by leverage. The equity stake of the transaction generated a higher return in case the company was doing well, as it only financed part of the transaction through debt. However, leverage also increases financial risk.

How VC Firms Generate Returns

Venture capital returns follow a power-law distribution. Most of the investments do not earn much or fail, but a few earn enormous profits. Often, a single successful investment drives a majority of a fund’s total returns.

Over the past 20 years, venture capital has averaged a 15.1% annual performance (Cambridge Associates), better even than many other asset classes.

Recent Trends: Private Equity vs. Venture Capital in India

The PE-VC market in India recovered to $43 billion in 2024, or 9% more than in 2022, after the previous two years of decline. The Bain & Company and IVCA report showed this was spearheaded by a 40% increase in venture capital volume and a record $33 billion in exits brought about by surging industries such as infrastructure and IT.

Venture capital and growth investments bounced to almost $14 billion, marked by a sharp increase in the volume of deals. On the other hand, deal activity in private equity remained stable. India has also further consolidated its position as the second-largest destination for PE-VC investments in the Asia-Pacific region with a share of the total market of 20%.

Private Equity vs Venture Capital: What’s Right For Your Business

Whether to use private equity or venture capital is purely dependent on the stage and purposes of your company.

Venture capital is most suitable when you are an early-stage start-up, whose growth prospects are high, yet the current cash flow is not massive. The amount of investment made by VCs is minor and in phases, and usually holds minority stocks. They do not require complete control, but provide their support, including guidance, connections, and strategic advice that can be utilized to scale fast.

In many cases, private equity is a better option in cases where the companies are older and are aiming at generating a consistent amount of revenue and are in need of finances to achieve expansion or restructuring, or even transformation. PE firms deploy more capital, assume majority control, and become engaged in the management to create value.

The choice depends on your company’s stage, growth ambitions, and willingness to give up control. When involving yourself in any investment deal, it is always important to seek expert advice to determine what it involves before investing.

Similarities Between Private Equity And Venture Capital

The key similarities between private equity and venture capital are as follows:

1. Investment in private companies: The two invest in privately owned companies. Although there are times when a private equity firm takes a public company, the latter is usually made private and removed after the transaction.

2. Same business model and fee structure: The institutions that provide capital include pension funds, endowments, family offices, etc., to PE and VC firms. They tend to have a model of the 2 and 20 system: the management fee is 2 percent a year, and the carried interest is 20 percent on the profits.

3. Competing investment bases: The same limited partners frequently invest in PE and VC since they seek to diversify in terms of sectors, geography, and in terms of the stage of company development.

4. Hands-on involvement: Each of those is actively involved in their investments, with many serving the role of board member and assisting management or the founder in growing the company and catalyzing performance.

5. Exit-driven strategy: At the end of the day, they both want to create returns that would come at the time of exits through either IPOs, mergers, or acquisitions.

Can You Move From Private Equity to Venture Capital?

You can shift from private equity to venture capital after gaining experience, skills, as well as a change in mindset. Typically, PE focuses on established companies with stable cash flow, while VC aims at early-stage start-ups with innovative business models. To make a jump, you need to build on what you already do well, while developing new skills and expanding your network. Here is what you need to do:

• Learn to embrace a greater risk and uncertainty attitude as a VC does.
• Use your finance and deal evaluation expertise to make the transition.
• Acquire skills in trendy business models and technological development in the early stages.
• Network by investing as an angel investor in startups and the VC networks.

Conclusion

Finally, private equity and venture capital both invest in private companies, but they operate in different ways. Typically, private equity invests in well-established businesses to improve efficiency and profitability. Venture capital funds early-stage startups that have high growth potential, though they come with higher risk. Understanding the key differences between private equity and venture capital can help you make better decisions, whether you are an investor, founder, or exploring a career in finance.

Private Equity vs Venture Capital: FAQs