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 EquityVenture Capital
Stage of investmentGrowing and Mature startupsEarly-stage startups
Industry focusInvest in a diverse portfolio across industriesFocus on some certain industries, namely information technology (mostly in the software sector), biotech, cleantech or fintech.
Number of investments10 or fewer investments per fund20-40+ investments per fund
Size of investmentsLarge investment (100M to 10B)Small investment (below 10M)
Return expectationsExpect that all of investments have positive returnsIf only 1 or 2 companies among VC’s portfolio can successfully go public or be acquired, VC can achieve its expected returns
Source of investmentUse both equity and debt to investUse equity to invest
Due DiligenceMore 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 ExtentPEs do control investing and gain controlling interest (the act of holding a majority of a company’s voting stock) in their portfoliosVCs do minor investing, in which the firm owns a small percentage of stake and will not involve much in the decision making process. VCs’ main objective is to grow a startup.
Portfolio ManagementHave operating partners to work directly with portfolio companies to improve operations, drive profitability and grow initiatives.Support to hire talents and build team  

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. 

You may check our detailed guide for private equity andventure capital career paths for further details

Private EquityVenture Capital
  • Analyst
  • Associate, including pre-MBA Associate and Post MBA Associate
  • Vice President
  • Director or Principal
  • Managing Director (MD) or Partner
  • Analyst
  • Associate, including pre-MBA Associate and Post MBA Associate
  • Principal or VP
  • Partner or Junior Partner
  • Senior Partner or General Partner
 
 
 
 
 Private EquityVenture Capital
AnalystPerform deal sourcing, reviewing potential investments, monitor portfolio companiesPerform deal sourcing
AssociatePerform deal sourcing and deal execution
Vice PresidentManage the deal teams, network, work with the senior partners of the fund on strategy and negotiationsExecute 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 fund, 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 into.
 
 
 
 

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 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 EquityTotal CompensationTotal CompensationVenture Capital
Analyst$100K – $150K$80K – $150KAnalyst
Pre-MBA Associates$150K – $300K$150K – $200KPre-MBA Associates
Post-MBA Associates$250K – $400K$200K – $250KPost-MBA Associates
Vice President$350K – $500K$250K – $400KPrincipal
Director or Principal$500K – $800K$400K – $600KPartner or Junior Partner
Managing Director (MD) or General Partner$700K – $2M$600K – $2MSenior 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 carry. The rest can be splitted 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 carry because of larger fund size; nevertheless, if timing is taken into consideration, working in PE does not equal to 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

PE firms recruit on on-cycle and off-cycle processes, which differ in targeted applicants, timing, and interview content.

 On-cycleOff-cycle
RecruitersMega funds and upper middle market fundsMostly lower middle market funds. Mega funds and upper middle market funds still can recruit if there are available slots
Target candidateAnalysts in bulge bracket and elite boutique banks
  • Analysts at smaller firms/banks
  • People who do not work in banks
  • Roles not in the NYC
When?The process will start in August or SeptemberThe process will start around December or January
TimespanDays to weeks ;Starts and ends very quicklyUsually months
InterviewA 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

Venture capital

Recruitment in VC is closer to Private Equity’s off-cycle. Some firms use headhunters, some utilize their network, and some self-source 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 on-going 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 EquityVenture Capital
Fit/backgroundStandard questions: Your resume, why this industry, strengths and weaknessesVC 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/IndustrySpecific questions about market and industry knowledge, for example: which market is attractive, which we should avoid, which companies should firm invest inQuite the same as PE’s questions
Firm-related questionsWhat 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 questionsStandard 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/ClientsWalk through 1-2 deals in depthSame 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 TestsModeling 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 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.