The difference between private equity and venture capital. | Wall Street Simplified

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In this video, I discuss the difference between venture capital and private equity!

Disclaimer: The views in this video are strictly my own, and are not those of my employer.

#wallstreet #finance #financecareers #banking #investmentbanking #privateequity #vc

Chapters:
00:00 Introduction
00:48 Venture Capital
01:30 VC Investment Strategy
02:35 VC Value Add
04:19 Private Equity
04:55 PE Deals
06:03 2 and 20 Model
06:26 Payouts
07:20 Conclusion

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Script:
The fundamental difference between PE and VC comes down to what types of companies they invest in, when they invest, and how they operate. Venture Capital firms focus on early-stage startups, investing in young companies with high growth potential, often before they’ve even turned a profit. These are the firms that funded companies like Uber, Airbnb, and Facebook back when they were just ideas. Private Equity, on the other hand, is about investing in mature businesses—companies that are already generating revenue but need restructuring, cost-cutting, or operational improvements to become more profitable. Instead of looking for the next big tech unicorn, Private Equity firms are looking for established businesses they can buy, improve, and sell for a profit.

Venture Capital firms invest in startups in exchange for equity, typically taking a minority stake in the company. Since these startups are high-risk, VCs spread their bets, investing in dozens of companies with the hope that a handful will become billion-dollar success stories. A great example of this is Sequoia Capital’s early investment in Google.

But Venture Capitalists don’t just provide money—they also guide and mentor the startups they invest in. They help founders with networking, hiring, scaling, and eventually taking the company public or selling it to a larger firm. Their goal is to see the company grow rapidly, increasing its valuation so that when they sell their shares, they can make huge profits.

Private Equity firms take a very different approach. Instead of investing in risky startups, they buy out entire companies, often using a strategy called a Leveraged Buyout (LBO). An LBO is like buying a house with a mortgage—PE firms use as little of their own money as possible and borrow the rest to finance the deal. This allows them to make massive acquisitions while risking minimal capital. Once they own the company, they aggressively cut costs, improve operations, and restructure the business to make it more profitable.

One of the most famous Private Equity deals in history was Blackstone’s acquisition of Hilton Hotels. In 2007, Blackstone bought Hilton for $26 billion, right before the financial crisis. At the time, many thought it was a terrible deal, but Blackstone restructured Hilton’s operations, improved efficiency, and strategically expanded the brand. In 2013, they took Hilton public, and by 2018, they had fully exited the investment, making a record-breaking $14 billion profit—one of the most successful private equity deals in history.

Another great example is KKR’s buyout of RJR Nabisco, one of the most famous deals of the 1980s, and one that was the inspiration behind countless deals and firms ever since. KKR acquired RJR Nabsico in a $31 billion leveraged buyout, which was the largest in history at the time. While the deal itself became infamous due to the power struggle over the company—immortalized in the book Barbarians at the Gate—it showcased how Private Equity firms use debt to take over massive corporations and restructure them for profit.

Both Private Equity and Venture Capital firms make money through a model called “2 and 20.” This means they charge a 2% management fee on all the money they manage and take 20% of any profits they generate.