A recent reader asked, why do I keep differentiating between private equity and venture capital, especially if Venture Capital (VC) is just a form of Private Equity (PE). Well, in the strict sense, venture capital is private and it is often structured as equity, ergo, venture capital is private equity. (With that same definition, a $100 investment into a friend’s lemonade stall may also qualify as private equity.)
Image: Venture capital and private equity = ying and yang firm
However, when I refer to private equity, I’m referring to a business model of investment. A few characteristics of this strategy include the following:
This definition differentiates private equity from family investments at points 2, 3 and 5. It also differentiates against venture capital at point 5. The implication of this point 5 is that while venture capital is often linked to research, commercialisation and monetisation, private equity is more closely linked to expansion, succession, buyouts and recaps.
More simply, to me, Venture Capital (VC) is about building a business, whereas Private Equity (PE) is about expanding a business. The difference may sound subtle, but it completely changes the model in terms of risk versus reward (see more here).