M&A Investors: What’s the Difference between Private Equity and Venture Capital?

From an M&A perspective, private equity (PE) firms differ from their more famous cousins, venture capital (VC) funds, in terms of the types of investment each fund pursues. PE firms typically invest in profitable companies, while VC funds invest in start-ups.

The PE firm usually makes the acquisitions by loaning the company money (and/or arranging the injection of debt in to the company), while a VC fund typically buys equity in the start-up.

A PE firm wants its portfolio company to continue to grow, so it may add on other synergistic acquisitions and then sell the company to another firm within a few years. Although enormous growth rates are usually desirable, most PE firms are realistic and don’t expect their portfolio companies to grow by quantum leaps. They aren’t seeking exponential growth but rather good, solid geometric growth.

A VC fund is betting the start-up will rapidly bloom into an enormous company (eBay, Microsoft, Sun, Google, and Apple are all examples of venture funded start-ups). The VC fund expects its investments to experience exponential growth; it needs to have this kind of return because many of the investments fail.

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