Private equity is sometimes confused with venture capital, as both refer to firms that invest in companies and exit by selling their investments to earn profits. However, there are significant differences in the way these two firms conduct business.
This article will discuss the key differences between venture capital and private equity: how they operate, and the career path, salary, exit opportunities and recruitment process of each type of firm.
1. Private Equity vs Venture Capital: An Industry Overview
Technically, venture capital is a light version of private equity. Both institutions raise funds from limited partners (high net-worth individuals, insurance companies, etc.) and invest in private companies. Their goals are the same: to increase the value of such businesses and then sell them or their equity stake (aka ownership) in them for a profit. While private equity firms usually invest in mature companies, venture capital firms invest in those during the seeding/ startup phase.
Following is the summary of the key differences between private equity and venture capital:
| Private Equity | Venture Capital | |
|---|---|---|
| Stage of investment | Growing and Mature startups | Early-stage startups |
| Industry focus | Invest in a diverse portfolio across industries | Focus on certain industries, namely information technology (mostly in the software sector), biotech, cleantech or fintech. |
| Number of investments | 10 or fewer investments per fund | 20-40+ investments per fund |
| Size of investments | Large investment (100M to 10B) | Small investment (below 10M) |
| Return expectations | Expect that all investments have positive returns | If only 1 or 2 companies among VC’s portfolio can successfully go public or be acquired, VC can achieve its expected returns |
| Source of investment | Use both equity and debt to invest | Use equity to invest |
| Due Diligence | More complex and expensive due to involving multiple 3rd parties specialists, such as lawyers, management consultants or auditors | Simple, even sometimes the investment is made just because the firm believes in the founders’ ideas. |
| Control Extent | PEs do control investing and gain controlling interest (the act of holding a majority of a company’s voting stock) in their portfolios | VCs do minor investing, in which the firm owns a small percentage of the stake and will not involve much in the decision-making process. VCs’ main objective is to grow a startup. |
| Portfolio Management | Have operating partners to work directly with portfolio companies to improve operations, drive profitability and grow initiatives. | Support to hire talents and build teams |
Comparison of the work between Venture Capital and Private Equity
2. Private Equity vs Venture Capital: Career Paths
Private equity and venture capital have similar career ladders, although the job titles are slightly different at the top of the pyramid. The main works are similar between the two, but with different focus: PE professionals spend a lot of time on complicated financial modeling and deal execution, while VC people spend more time on qualitative research and networking.
Private Equity: Analyst, Associate (including pre-MBA Associate and Post MBA Associate), Vice President, Director or Principal, Managing Director (MD) or Partner.- Venture Capital: Analyst, Associate (including pre-MBA Associate and Post MBA Associate), Principal or VP, Partner or Junior Partner, Senior Partner or General Partner.
You may check our detailed guide for private equity and venturecapital career paths for further details.
| Private Equity | Venture Capital | |
|---|---|---|
| Analyst | Perform deal sourcing, reviewing potential investments, monitor portfolio companies | Perform deal sourcing |
| Associate | Perform deal sourcing and deal execution | |
| Vice President | Manage the deal teams, network, work with the senior partners of the fund on strategy and negotiations | Execute deals and manage portfolio |
| Director (PE) or Partner (VC) | Raise fund, network, and manage LPs (basically, it is a transition position between principal and general partner) | |
| Managing Director (PE) or General Partner (VC) | Raise funds, directly manage the company’s portfolio, perform deal origination & “fund representation” (in conferences, etc.) | Raise funds, network, manage LPs and make final investment decisions. Only the GP can decide which company to invest in. |
Job description for private equity and venture capital positions
3. Private Equity vs Venture Capital: Salary and Bonus
Private equity professionals almost always enjoy higher salaries than venture capital’s ones with the same job title. Analysts in both PE and VC can expect a similar annual salary of $100K to $150K in total. The pay is just significantly different when they move up to associate levels. PE associates can earn up to $400K, compared to $250K at VC.
Larger fund size and more money involved are what makes private equity pay higher than venture capital. Moving up the career ladder, a director in PE can earn up to $800K, whereas the number for a partner in VC is $600K. However, both managing director of PE or general partner of VC can top out at $2,000K. If you want to learn more about the salaries of the two, referencing our private equity salary and venture capital salary.
Let’s take a look at the table below to see how the total compensation progresses in both PE and VC:
| Private Equity | Total Compensation | Total Compensation | Venture Capital |
|---|---|---|---|
| Analyst | $100K – $150K | $80K – $150K | Analyst |
| Pre-MBA Associates | $150K – $300K | $150K – $200K | Pre-MBA Associates |
| Post-MBA Associates | $250K – $400K | $200K – $250K | Post-MBA Associates |
| Vice President | $350K – $500K | $250K – $400K | Principal |
| Director or Principal | $500K – $800K | $400K – $600K | Partner or Junior Partner |
| Managing Director (MD) or General Partner | $700K – $2M | $600K – $2M | Senior Partner or General Partner |
Carried interest (or carry) is another source of income that makes private equity & venture capital paths attractive. It is a percentage of a fund’s net profits if the returns are above a certain hurdle rate, after deducting management fee. Normally, carry is about 20% of the profits.
Hurdle rate is a commitment of the firm to Limited Partners (LPs). Instead of investing in other equity, LPs choose to put money in PE funds, a higher than market risk and want a minimum IRR (hurdle rate) before sharing profits with General partners.
It is very unlikely that an analyst and pre-MBA associate will get any carry. The managing director (or partner) in PE and the senior partner (or General Partner) in VC will get the large portion of carrying. The rest can be split among other levels in the firms – the higher position someone is, the better carry they can get.
It seems that a PE Partner will get more from carrying because of the larger fund size; nevertheless, if the timing is taken into consideration, working in PE does not equal earning more. A PE firm is often bigger with more hierarchies than a VC firm; therefore, it will take more time to reach the MD level.
4. Private Equity vs Venture Capital: Work/Life Balance
Overall, the working hours in traditional private equity firms tend to be longer compared to venture capital, where the approach is much more of a “normal” workweek. This is because processes and time to term sheet in VC are faster than PE and sometimes decisions to move forward with a deal are made within weeks vs. months in traditional PE.
Private equity working culture pretty much resembles investment banking, with long hours (60 – 80 hours per week), heavy focus on deals and significant technical analysis (financial modeling, etc.). Venture capital hours are more relaxed (about 50 – 60 hours a week); the work is also more qualitative and revolves more around meetings/networking.
5. Private Equity vs Venture Capital: Exit Opportunities
Common exit opportunities for private equity include venture capital or senior positions in portfolio companies; and exit opportunities for venture capital are start-ups, transitions to other VC firms and operational roles in certain industries. Generally, it is more difficult to go from venture capital to private equity than the other way around, as VC work tends to be more specialized.
Junior private equity/ venture capital professionals tend to stay in their funds and earn experience, go for an MBA or join a portfolio company, as their job consists of working with portfolio companies to help them grow.
Note: It’s rare for PE and VC professionals to go back to investment banking, as PE and VC themselves are viewed as investment banking exit options.
6. Private Equity vs Venture Capital: Recruitment Process
6.1. Common backgrounds to get into private equity & venture capital
The common between VC and PE is that fresh graduates do not have many opportunities to get into those firms. They prefer professionals who have 2-3 years experience as both require certain technical knowledge, network, and market understanding. Experience in investment banking seemingly works best.
There are more chances for non-financial experienced candidates to get into VCs if the candidate has relevant experience, normally experience in technology industries, where VC mostly put money in. VCs often look for people who skew more to incubating startups and networking besides being an excel/VBA guru.
Meanwhile, PE preferred people who came from investment banking as PE analysts and PE Associates have to deal with plenty of financial modelings, or LBOs in the whole deal execution process. Of course, there are always exceptions if a candidate owns specific skills and knowledge that the firm is looking for, for example, an operational PE fund might look for experienced candidates in cleantech startups to manage its portfolio companies.
6.2. Recruitment process
Private equity firms recruit on on-cycle and off-cycle processes, which differ in targeted applicants, timing, and interview content.
| On-cycle | Off-cycle | |
|---|---|---|
| Recruiters | Mega funds and upper-middle market funds | Mostly lower middle-market funds. Mega funds and upper-middle market funds still can recruit if there are available slots |
| Target candidate | Analysts in the bulge bracket and elite boutique banks |
|
| When? | The process will start in August or September | The process will start around December or January |
| Timespan | Days to weeks Starts and ends very quickly | Usually months |
| Interview | A paper LBO or a two-three hour LBO is more common in On-cycle recruitment. | Focuses on the in-depth thought process; therefore, taking-home LBO model and presentation is often applied |
Meanwhile, recruitment in venture capital is closer to Private Equity’s off-cycle. Some firms use headhunters, some utilize their network, and some self-sourced to look for potential candidates. Anyone eyeing on VC has to network for jobs with both headhunters and the firm itself. Because the VC recruitment is need-based, not an ongoing process, during any networking event, you can ask Venture Capitalists their opinions about a career in VC.
The process is not framed in any clear timeline. It can be very quick if the firm urgently needs a person to fill the vacancy, or also can last for months.
6.3. Resume
The similarity between private equity and venture capital is that they should both be deal-oriented. If you don’t have deal experience, twitch your resume so that your experience sounds deal-related. For example, management consultants should demonstrate his/her experience in restructuring projects, or someone from Big4 can talk about a Valuation project with a buy-side firm.
Particularly for venture capital, it is better to pick deals that are relevant to that VC firm. For example, a VC, which is investing in Biotech, is more interested in a candidate who worked in a Biotech deal than a normal one.
6.4. Interview
Following is the comparison between the interview rounds of private equity and venture capital:
| Private Equity | Venture Capital | |
|---|---|---|
| Fit/background | Standard questions: Your resume, why this industry, strengths and weaknesses | VC also asked the same standard questions. At the back, the weight of fit questions in VC is higher than in PE and you will meet everyone in a VC firm and people will assess how “fit” you are with the team |
| Market/Industry | Specific questions about market and industry knowledge, for example: which market is attractive, which we should avoid, which companies should firm invest in | Quite the same as for PE’s questions |
| Firm-related questions | What do you know about our firm? How does the firm fit in your long term goals? | Questions related to the candidate’s opinions about the firm’s portfolio How to analyze a potential investment? |
| Technical questions | Standard questions about accounting, and valuation/DCF analysis. | Similar questions in traditional PE as well as key metrics in the industry, how to value startups and market sizing. |
| Deals/Clients | Walkthrough 1-2 deals in depth | Same as PE, candidates also walk through their deal experience. However, candidates should choose a case applicable to VC – cases in Tech or a case that required heavy market analysis instead of financial modeling. |
| Case Studies and Modeling Tests | Modeling tests can range from 1-3 hours (on-cycle) to several days to a week (off-cycle) and can vary from a simple paper LBO to a full package, including investment thesis, and risk factors. | Less likely for VC or can be just an investment recommendation or a market/startup analysis. |
7. Bottom Line: Which One Should I Choose?
So, private equity vs venture capital, which should you choose?
- Private equity is more heavily deal-oriented, with better pays but more working hours (60 – 80). If you like to work in transaction deals, or you’re trying to make money in the shortest amount of time possible, private equity is a better option.
- Venture capital is more relationship-driven, with a better work-life balance (50 – 60 hours per week). If you’re more interested in starting your own company one day and you prefer relationships for analysis, then venture capital is the choice for you.
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Private Equity vs Venture Capital: Key Differences
Private equity and venture capital are often confused with each other, but they have significant differences in how they operate. Private equity firms typically invest in mature companies, while venture capital firms focus on early-stage startups. Here are some key differences between the two:
- Stage of Investment: Private equity invests in growing and mature startups, while venture capital invests in early-stage startups.
- Industry Focus: Private equity firms invest across diverse industries, while venture capital firms focus on specific industries like information technology, biotech, cleantech, or fintech.
- Number of Investments: Private equity firms typically make 10 or fewer investments per fund, while venture capital firms make 20-40+ investments per fund.
- Size of Investments: Private equity firms make large investments ranging from $100 million to $10 billion, while venture capital firms make smaller investments below $10 million.
- Return Expectations: Private equity firms expect positive returns from all investments, while venture capital firms rely on a few successful companies in their portfolio to achieve expected returns.
- Source of Investment: Private equity firms use both equity and debt to invest, while venture capital firms primarily use equity.
- Due Diligence: Private equity due diligence is more complex and expensive, involving multiple third-party specialists, while venture capital due diligence is simpler and sometimes based on the firm's belief in the founders' ideas.
- Control: Private equity firms gain controlling interest in their portfolios and have more control over decision-making, while venture capital firms have minor investments and focus on growing the startup.
- Portfolio Management: Private equity firms have operating partners who work directly with portfolio companies, while venture capital firms provide support in hiring talents and building teams.
Private Equity vs Venture Capital: Career Paths
Private equity and venture capital have similar career paths, but with slight differences in job titles. The main roles in both include Analyst, Associate, Vice President, Director/Principal, and Managing Director/Partner. Private equity professionals focus more on financial modeling and deal execution, while venture capital professionals spend more time on qualitative research and networking.
Private Equity vs Venture Capital: Salary and Bonus
Private equity professionals generally have higher salaries than venture capital professionals with the same job title. For example, PE associates can earn up to $400,000, while VC associates earn around $250,000. The difference in pay is due to larger fund sizes and more money involved in private equity. However, both managing directors in PE and general partners in VC can earn top salaries, reaching up to $2 million.
Private Equity vs Venture Capital: Work/Life Balance
Private equity firms often have longer working hours, similar to investment banking, with 60-80 hours per week. Venture capital firms have a more relaxed workweek, with about 50-60 hours per week. The working culture in private equity is focused on deals and technical analysis, while venture capital work is more qualitative and revolves around meetings and networking.
Private Equity vs Venture Capital: Exit Opportunities
Common exit opportunities for private equity professionals include venture capital or senior positions in portfolio companies. For venture capital professionals, common exit opportunities include startups, transitions to other VC firms, or operational roles in specific industries. It is generally more difficult to transition from venture capital to private equity due to the specialized nature of VC work.
Private Equity vs Venture Capital: Recruitment Process
The recruitment process for private equity and venture capital differs slightly. Private equity firms have on-cycle and off-cycle processes, targeting different applicants and interview content. On-cycle recruitment is focused on analysts in bulge bracket and elite boutique banks, while off-cycle recruitment is more open to analysts at smaller firms or banks. Venture capital recruitment is need-based and can vary in timing and process. Networking and relevant experience, especially in technology industries, are beneficial for VC roles.
Bottom Line: Which One Should I Choose?
Choosing between private equity and venture capital depends on your preferences and career goals. Private equity is more deal-oriented, with higher pay but longer working hours. If you enjoy transaction deals and want to make money quickly, private equity may be a better fit. Venture capital is more relationship-driven, with a better work-life balance. If you are interested in starting your own company and prefer relationships for analysis, venture capital may be the right choice for you.
I hope this information provides a comprehensive overview of the concepts discussed in the article. If you have any further questions or need more specific information, feel free to ask!
