Although Private Equity (PE) and Venture capital (VC) both invest in startups and make money by selling their investment later, they differ significantly in plenty of aspects. In this article, we will layout all commons and differences between PE and VC in terms of work nature, career ladder, team background and recruitment process.

1. Private Equity And Venture Capital: The Work Nature

1.1 The Commons

Technically, Venture Capital is a sub-branch of Private Equity. Both institutions raise funds from Limited Partners, including high net-worth individuals, endowments, insurance companies, or pension funds, etc. The main objective is to sell those companies in the future to make returns.

1.2 The Differences

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  Private Equity Venture Capital
Industry focus Invest in a diverse portfolio across industries Focus on some 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
Return expectations Expect that all of 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. (LBO – Leveraged Buyout). Use equity to invest
Due Diligence Growing and Mature startups Early-stage startups
Stage of investment Growing and Mature startups Early-stage startups
EBITDA of investees EBITDA > 0 EBITDA <= 0
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 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 team  
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2. Private Equity and Venture Capital: Career Path

2.1 Structure and responsibility across levels in the firm

Private Equity and Venture Capital have similar career ladders, although the job titles are slightly different at the top of the pyramid.

 

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Private Equity Venture 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
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In both Private Equity and Venture Capital, Analyst and Associates are the two main entry levels. Responsibilities across level are also much similar between both sides. 

However, getting into a PE firm post MBA without any Investment Banking or PE experience is too challenging in the US market. Either you choose a small firm in the US or you join PE in Non – US markets.  

Non US markets seem to lessen this rule as PE firms there are more willing to take professionals employees from Big4 or Management Consulting. 

Another significant difference is the size of the Analyst team in PE and VC. As VC depends on other qualitative researches to source deals and decide the investment, there will not be as many analysts in VC as in PE. PE uses a lot of resources to find the investment target and conduct due diligence. 

2.2 Salary, bonus and carry in PE and VC

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Private Equity position Salary & Bonus in Private Equity Salary & Bonus in Venture Capital Venture Capital position
Analyst $100K – $150K $80K – $150K Analyst
Pre-MBA Associate $150K – $300K $150K – $200K Pre-MBA Associate
Post-MBA Associate $250K – $400K $200K – $250K Post-MBA Associate
Vice President $350K – $500K $250K – $400K Principal
Director/Principal $500K – $800K $400K – $600K Partner/Junior Part
Managing Director/General Partner $700K – $2M $600K – $2M Senior Partner/General Partner
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Source: Firm research

Carried interest (or Carry) is another source of income that makes PE and VC path 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 he or she 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.   

Focusing on only salary and bonus, PE’s people enjoy higher salary than VC’s ones with the same job title, but working hours and culture at PE is much more similar to Investment Banking while in VC, people tend to have more work-life balance.  

 

3. How to Get into Private Equity and Venture Capital?

3.1 Preferred background  

Here we capture the summary table in our WallStreet Career Planning tool about opportunities to get into Private Equity and Venture Capital across backgrounds for your reference. 

Background for PE and VC

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.  

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 beside 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.   

3.2 Recruitment process 

As we wrote about the recruitment process in Private Equity and Venture Capital in several articles, here we only highlight key differences.

 

Private Equity: there are on-cycle and off-cycle processes, and both differ in targeted applicants, timing, and interview

 

3.2.1 On-cycle recruitment process:

  • Target: 

The on-cycle process mostly targets Analysts at Bulge Bracket and Elite Boutique Banks for Associate positions at Mega-funds and Upper Middle Market funds. However, as the industry keeps growing, PE firms now also organize on cycle recruitment for Summer Analyst Program (i.e: internship) and Full-time Analyst Program. 

  • Process: 

For Associate positions, the process can start as early as July to October, only a couple of months after Analysts at Bulge Bracket or Elite Boutique Banks start their jobs.  If you finish the process and you get the job offer, you can only start in the next 1.5 – 2 years. For example, if you get the offer in 2021, you will only start your PE career in 2023.

The headhunters have more power on the Associate On-cycle recruitment process compared to Off-cycle. After getting your CVs, the headhunters will contact you and set up a telephone interview. Some common questions in this interview could be: “Walk me through your resume?”, “Why Private Equity?”, “Why this firm?”, etc. If you can impress the headhunter, they will pass your CV to the firms. Hence, headhunters decide whether you can go to the next round. You would better show up well prepared and win them in the telephone interview. 

The PE firm will invite you to “a weekend event”, in which the most nightmare part of On-cycle recruitment happens. You will have four to five 30-minute interview sessions with people across levels in that firm. If you can pass, the firms will call you for an LBO model test. Finally, you will have the result on Monday.  

3.2.2 Off-cycle recruitment process:

  • Target

The Off-cycle process is applied for below situations:

  1. Middle Market funds recruiting Associate positions, 
  2. Positions in non-US markets,
  3. Positions for non-experience in Investment Banks 

Among those 3, Middle market firm recruitment is the most common case. Therefore, we will focus on the process of (1). The requirement, timeline and process of (2) and (3) will depend on which exact position the firm is recruiting

  • Process: 

The process of recruiting will start after the On-cycle process, from December to February. Successful candidates in this track will start 1.5 – 2 years later, the same timeline as On-cycle successful candidates. 

However, if you apply for any vacancy that firms need immediately, you can start instantly. Those recruitment timelines are more random throughout the year. 

The off-cycle recruiting process usually lasts longer, in which recruiters want to assess your “fit” and critical thinking abilities on deeper levels and they also require more thought and preparation of a real investment thesis. 

 

Venture Capital: the recruitment is closer to Private Equity’s off-cycle one.

 

Some firms use headhunters, some utilize their network, or 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. It also can last for months.  

3.3 Resume

We will not deep dive into what should and should not be written in a resume. We talked about that in our Private Equity resume article. 

To sum up, for Private Equity: 

For Venture Capital

3.4 Interview 

Again, we will not jump into the step-by-step guidelines for an interview in Private Equity and Venture Capital as we have several articles already. 

Here is a comparison between an interview in Private Equity and Venture Capital so that you know which knowledge and skill you should direct your energy to if there is an upcoming interview. 

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  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 PE’s questions
Firm-retailed questions Typical questions are: What do you know about our firm? How the firm fits in your long term goals? What do you think about the firm’s portfolio at the moment? 

Seem that only VC focus on questions, such as:

  • Candidate’s opinions about the firm’s portfolio
  • How to analyze a potential investment?
Technical questions Standard questions about accounting, and valuation/DCF analysis.  VC also asks questions about accounting and valuation as well as key metrics in the industry, how to value startups and market sizing.
Deal/Clients Walk through 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 Study and Modeling Test 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.
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Those are all commons and differences between PE and VC in different angles: work nature, required skill sets and background so that you can decide which path is more suitable to your interest and motivation, then you can be well-prepared to get into each industry.

 

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