Private Equity and Venture Capital: What’s the Difference?

Silicon Flatirons has released a new Roundtable report on venture capital and private equity, available for download here.

With Dodd-Frank steadily featured in national financial and investing news, the Silicon Flatirons Entrepreneurship Initiative hosted a spring Roundtable discussion on how “venture capital” differs from “private equity,” particularly insofar as the distinction implicates the SEC’s definition of a venture capital fund. (A fund that meets the definition need not register under the Investment Advisers Act of 1940.)

The report covers issues surrounding venture capital and private equity, including several key observations from Roundtable participants, namely:

• Dodd-Frank will impose costs on both PE and VC firms, but only will change how a small subset of firms actually operates.  The venture capital fund definition will impose administrative and compliance burdens for registered firms and also will constrain firms’ flexibility by limiting the types of deal structures that they might use.

• The PE/VC distinction is a complex assessment; the use of leverage and certain operational differences suggest grounds for delineation, but differences between PE and VC largely exist on a spectrum.  The perception of a sharp culture clash ignores the many nuanced shades of PE and VC, but the issues of leverage and how each industry approaches regulation suggest that at least some differences are more pronounced.

• The next major regulatory challenge implicating the PE/VC distinction will be legislation concerned with systemic risk (such as the Volcker rule).  Against a backdrop of fears about systemic risk, the PE/VC distinction will feature in questions of federal rulemaking and regulatory gamesmanship, but Roundtable participants were adamant that neither PE nor VC, however defined or distinguished from one another, meaningfully pose systemic risk.

Developing an ironclad rubric for distinguishing private equity from venture capital clearly is no easy task, but the points above form an interesting basis for understanding regulatory attitudes towards PE and VC that have spurred no small amount of commentary and debate.  If you want to contribute to the debate or conversation, please share your thoughts here or otherwise reach out.

Dave Mangum is a Fellow at Silicon Flatirons Center and Executive Director of Startup Colorado.