Private equity vs venture capital: A side-by-side comparison

Whether a business is established or just starting out, an infusion of capital can make all the difference to its growth. A company that needs funding to grow might turn to a private equity or venture capital firm. However, private equity and venture capital are not the same. They differ in their methods and the types of companies they target. Understanding the difference is crucial.

Private equity vs venture capital in Canada: An overview

Private equity

Private equity (PE) is a pooled investment vehicle that enables a group of investors, usually large institutional investors, to purchase equity in private companies. While some PE firms involve minority stakes, they frequently acquire a majority stake in the business.

In buyout scenarios, once the investment is made, the PE fund can take an active role in the management and direction of the business to help increase its profitability. The idea is to invest in companies with growth potential, so the companies and investors can work together to improve the business with the end goal of selling the company for a profit or taking the company public to realize returns.

Venture capital

Venture capital (VC) is a form of private investment that raises capital from institutional investors, financial institutions and high-net-worth individuals. VC firms invest in startups and early-stage companies with growth potential. In addition to capital, VC firms can also offer strategic guidance and technical or managerial support.

For their investment, venture capitalists typically receive a minority ownership stake in the company. That means while they take part in the rewards, they can also incur significant losses if the company fails. Thus, VC is considered a high-risk form of investing, but it can also have major rewards if the company is successful.

While private equity and venture capital opportunities have traditionally only been available to accredited investors, platforms like Wealthsimple, FrontFundr and Equivesto have broadened access for regular investors.

Venture capital vs private equity: Key differences

There are several key differences between private equity versus venture capital.

• Stage of business. Venture capitalists generally invest in businesses in the seed or early stages, allowing them to benefit as the company grows. PE firms generally step in later, after the company is generating regular revenue and has shown proven returns.
• Investment size. There is an enormous difference in the size of investment made by PE versus VC firms. Private equity firms in Canada generally invest under $25 million up to billions of dollars, while venture capital firms typically invest around $10 million or less, although later-stage VC rounds may exceed that. Ultimately, the investment value depends on factors like the company, industry and revenue.
• Type of investment. Venture capitalists typically invest using equity. PE firms often combine equity and debt, especially in buyouts, to take on a majority interest in a company. However, some PE investments are growth focused and give investors a minority stake.
• Ownership stake. PE firms generally take a controlling stake in companies, while venture capitalists take a minority stake. VC firms can earn on average an internal rate of return (IRR) of around 10%, while PE firms generally yield returns of 11% or more (net of assets).
• Involvement. Venture capitalists are typically less involved in the day-to-day operations. PE firms, particularly in buyouts, are much more involved and often take a hands-on role, given their ownership stake and hefty investment.
• Risk level. Venture capitalists generally face higher risk with their investment, because they are investing in a business in its early stages. With a new company, there is no history of demonstrable success, so it is a gamble for investors seeking a return. PE firms, on the other hand, can review financials to ensure a company is profitable before investing.

Bottom line

Both private equity and venture capital are a way for companies to grow by adding capital. However, a few key factors differentiate private equity and venture capital. Investor objective, equity stake and investment size all play major roles in distinguishing one investment type from the other.

Before committing to an investment, consult a financial advisor for personalized advice regarding your portfolio.

FAQs about venture capital vs private equity

• What are some examples of private equity firms in Canada and the US?

  Examples of private equity firms in Canada include Birch Hill Equity Partners, Brookfield Corporation and Alaris Equity Partners. In the US, leading firms include Alpine Investors, Bain Capital and Thoma Bravo.

• What are some examples of venture capital firms in Canada and the US?

  Examples of venture capital firms in Canada include Real Ventures, Golden Ventures and Panache Ventures. Well-known venture capital firms in the US include Andreessen Horowitz, General Catalyst Partners and Bessemer Venture Partners.

• Is venture capital the same as private equity?

  No, venture capital is not the same as private equity. Venture capital focuses on early-stage startups with high growth potential, while private equity typically targets mature companies. Both raise capital from institutional investors and high-net-worth individuals, but they differ in investment size, ownership structure and risk profile.

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To make sure you get accurate and helpful information, this guide has been edited by Stacie Hurst as part of our fact-checking process.

Written by

Lena Borrelli

Contributor

Lena Borrelli is an experienced finance writer with a deep understanding of personal finance, investing and consumer banking. Her work has been featured in top-tier publications such as Forbes, TIME, Bankrate, Moneywise and Annuity.org, where she provides expert insights on financial trends, smart money management and emerging fintech solutions. With a background in personal finance and content strategy, Lena specializes in breaking down complex financial topics into clear, actionable advice for readers. When she is not writing or scanning the news for the latest headlines, she is happiest spending time in the Florida sunshine with her husband and two pups. See full bio