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Private equity vs venture capital: what’s the difference?

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4 mins read

Updated on 31 January 2023

Our subject expert
Brigitta Naunton

Partner - Corporate

Understanding the difference between private equity and venture capital is essential if you’re planning to raise funds or invest in a growing business. While both offer routes to scale and success, they come with very different expectations, strategies, and levels of involvement.

This guide is for founders, business owners, and management teams exploring external investment options. You’ll learn how private equity and venture capital differ, when each is typically used, and how to assess which is better suited to your business goals and stage of growth.

If you're weighing up the right type of investment for your business or preparing to speak with investors, our expert funding round lawyers can help you navigate the legal and commercial considerations with confidence.

What is private equity investment?

Private equity (PE) is a term used to describe finance given to a company in return for its shares. Typical investors are high net-worth individuals (sometimes called angel investors), private equity firms and institutional investors like pension funds.

Although some private equity investments involve buying a business outright, more typically PE investors take an equity stake. PE investors usually look for fast-growing, well-established, unlisted businesses, and they tend to invest for the long term – think four to seven years. At this point, they will seek to exit the business by selling their stake and hope to make a substantial profit.

PE is often used to assist management buy-outs or management takeovers, and the private equity investor will work closely with the business’s leadership team to help run and develop the business.

If you want to retain complete control of your operation, you may find the involvement of a private equity firm stifling. However, if you’re keen to harness the skills of expert advisors who can help you make efficiency savings, enhance your supply chain and boost sales, you may find the input of a private equity investor invaluable.

What is venture capital investment?

VC is a branch of private equity investment, specifically aimed at start-ups and innovative, small businesses with fantastic potential to grow and scale.

VC investors include single angel investors and institutions. Although businesses from all sectors attract venture capital investment, the preferred sectors are emerging and innovative such as tech. VC investors are on the lookout for high-potential companies that promise a rapid rate of growth and large returns. They may offer expertise alongside funding and are prepared to accept a higher degree of risk.

Just as with traditional private equity investment, you will need to give up a degree of control over your business in return for finance and advice. The venture capitalist will aim to exit your business after four to six years.

If your company is relatively new (less than two year’s old), VC might be a good choice for you, particularly if you’ve no other potential sources of funding such as bank loans.

Private equity vs venture capital

Private equity	Venture capital
PE investors look for mature companies	VC firms invest in early-stage and start-up companies with the potential for high growth
Target companies may be struggling	Target companies are relatively new but show promise
PE investors may buy all or a large percentage of the target’s shares	VCs may invest in many businesses to spread their risk
PE investors may buy a company to turn it around and sell at a profit	VC investors are looking to help a company scale and grow so that they can turn a profit when they sell
PE investors expect to be heavily involved in a fewer number of businesses	VC investors will offer advice but the degree of their involvement will differ
Large amount of funding compared to VC investment	Smaller funding compared to PE
PE investors will invest in all sectors	VC investors target new and emerging sectors

How to secure private equity or venture capital backing

Before you start looking for private equity or venture capital investment, you’ll need to make sure your business is attractive to investors.

For this, you’ll need a sound grip on your finances, a solid business plan and the perfect pitch. Without these, you’re unlikely to secure investment.

When you’re confident that you’re ready to face investors, you need to seek them out. Your local business network is a good place to start.

These websites are also good:

The Angel Investment Network has over 250,000 angel investors looking to invest different sums of money all ready to hear your pitch, and you can pitch to them online

Pitchbook provides data on the private equity and venture capital market in the UK and worldwide

By becoming a member of the British Venture Capital Association, you can gain access to their member network that includes both VC and PE firms.

When your business is ready for funding, our team of corporate solicitors is ready to advise you on where to look, how to choose between PE and VC investment, and also consider other alternatives such as crowdfunding. We’ll help you prepare all the necessary documents such as term sheets, and share cap tables.

About our expert

Brigitta Naunton

Partner - Corporate

Brigitta is a partner in Harper James’ corporate team, specialising in M&A, sales, equity fundraising, joint venture arrangements, share reorganisations, management buy-outs, lending arrangements and corporate governance.

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