VC 101: Private Equity vs. Venture Capital
We explain the differences between two key alternative asset classes
Private equity and venture capital are alternative assets that can help accredited investors diversify their portfolios from public markets. In this video, Chief Community Officer Luke Antal explains some of the key difference between these key asset classes.
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Differences Between VC & PE: The Power Law and More
Private equity and venture capital are alternative assets that can help accredited investors diversify their portfolios from public markets. An important distinction between these asset classes is how investors build their portfolios to increase the potential for outsized returns, specifically regarding the Power Law.
The Power Law argues that a small number of investments provide the majority of returns, and therefore, investors should build large, diversified portfolios to increase the potential of investing in successful companies.
In private equity, the Power Law isn’t really a factor. PE firms typically make larger investments in a smaller number of mature, distressed companies with favorable growth prospects. After a period of several years or longer, they look to sell the company at a higher price.
On the other hand, venture capital is a Power Law asset class. VC firms usually make many smaller investments in a large number of private, emerging technology companies. The goal is to build a well-positioned portfolio that earns most if its returns from a small number of successful exits, typically through M&A or IPO.
Below are other differences between the two asset classes:
Target CompaniesFewer investments in mature companies across industries that are often distressed or restructuring, but still have favorable growth prospects
Deal Size & TermsRelatively large deals of $100+ million, funded through a combination of equity and debt
Investor InvolvementControl of the company is usually assumed by the acquiring PE firm, which often oversees management changes and financial engineering
Target CompaniesA larger volume of private, emerging technology investments, ranging from small startups to large, pre-IPO companies
Deal Size & TermsMulti-investor rounds of anywhere from $100,000+ to $10+ million, invested from funds of pooled private capital
Investor InvolvementFounders typically retain control of the company, while VC firms receive equity and often serve in an advisory capacity