Private Equity vs. Venture Capital in 2018

It's 2018, and both PE and VC deal activity have rarely been higher. As a 3rd year Analyst in Consulting with both PE-transferable skills (Corp Fin cases, commercial due diligence) and VC-transferable skills (tech major), which of the two is a clear winner.

Here's my understanding - please do shout if something is incorrect:

PE has come clear advantages when it comes to comp, and being able to drive more impact (fund owns the target vs. a minority equity stake). Also, it's very possible to go to VC post PE. However, PE has more of a choke point at VP, and potentially faces a bigger downturn should we see anything like 2008.

VC has many things going for itself - meeting exciting people / ventures, building your own brand etc. Also, believe it's got a bit more of a moat (through the network you build). But it massively loses out on the comp front (~$180k vs. ~$250-300k?) Apart from that, less transferable to other investment strategies.

What do you think?

Comments (26)

Feb 11, 2018

Also, happy to answer any questions about positioning oneself for PE & VC pre MBA as a Consulting analyst

Mar 10, 2018

I currently have a timed two hour 'test' interview tomorrow for a VC firm. What can I expect to be building in this exercise as they identified it would test a compilation of excel, powerpoint, reading comprehension, and writing

Aug 31, 2019

Hello, I am a third year consultant looking to lateral into VC / growth equity and seeking guidance on how to position myself for the recruiting cycle, key points of my experience (CDD / ODD) to highlight in the recruiting process, and essential skills gaps I need to close. Also looking to gain insight into story structure of moving from Consulting to VC / growth equity and any other interviewing tips.

Feb 11, 2018

In VC, you trade off immediate comp for access to high risk/high reward opportunities that will be 10-20x of the money you are forgoing (joining a startup, building a brand, etc).

In PE, you get more "security" through a structured program / progression and your role is very much defined.

You can apply to the same exits through either VC or PE but the immediate access to certain types of opportunities will differ.

Just depends what excites you more.

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Feb 11, 2018

Agree with your points on the defined roles. However, with the defined roles, you also face a steeper choke point (usually VP promotion).

Unsure how similar the exits are. Believe the exits from PE are other PE (usually smaller) / industry / potentially VC? Believe the exits from VC are other VC (usually smaller) / portfolio company / large tech?

Feb 11, 2018

Hey there. Bumping for thoughts on positioning for PE / growth equity. I have a similar profile and agree with OP on the skill set alignment: due diligence, valuation, sourcing. But there may be one important "skills gap" whose importance I want to explore given its importance in PE: deals execution experience.

Given the sensitivity of LBO's returns to how the target is initially valued, structured, (re-)capitalized and ultimately exited, there's naturally going to be a premium on execution experience.

But outside of major LBO shops, I would imagine that's a skills gap that can be closed or otherwise overlooked given your ability to impact topline growth and your ability to assess and affect the operating income portion of the P&L. That suggests there may be more opportunities in VC and growth equity than traditional PE.

The problem with VC is that given the unknowns, I find it very hard to believe one can really perform a rigorous analysis of a business -- and even a product -- despite what everyone likes to pretend. I work in strategy at a large technology firm: it's hard to get it right. Doing this with a startup, unless you have extremely deep domain expertise, seems especially difficult.

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Feb 11, 2018

Agree on the point around deal execution. However, don't you have to ask yourself how defensible that skill is. I see two key skills in a PE associate (apart from ability to work extremely hard, sharp thinker etc., which are a given) - familiarity with a process, and modelling. As you grow more senior, both of those are less important compared to sourcing and relationships.

Yes - VC tends to either be (a) we see the best deals and get in on them or (b) we are playing by our gut. There's less data / numbers / analysis. Which brings an interesting point - success in IB / Consulting does NOT signal success in VC at all, while it does in PE to a great extent. Do you feel nervous about that?

Feb 11, 2018

If your goal is comp, PE hands down. In terms of optionality and (IMO) more interesting work, VC. I think PE places you well for investing roles in general if staying in investing is your long-term objective. VC places better in startups and operational roles outside of finance

An important thing to note too is that your experience in a VC will vary significantly more by firm than PE. Some VC's are source-heavy, others are operationally heavy. For PE, sourcing can also be a major component but it's mainly financial engineering and focused on cash-flow heavy corporates.

Another important thing you brought up is networking. I like VC more specifically because it's part of your job to actively engage and grow your network, which essentially is investing in yourself. You also get to see (money-losing) interesting companies and a wider range of interesting characters/entrepreneurs.

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Feb 11, 2018

Agree with a lot of what you said - in VC, you're "being paid" to build your network and brand. And ultimately, the top position in every job is sourcing - so no bad thing to build that muscle early. However, it does seem like joining PE doesn't close the VC door while earning you a bunch more (this is just the risk aversion talking!)

What do you think are the biggest pros in VC that financially outweigh the PE track? One big thing that comes to mind is that there's less of a funnel / choke point - so the track is a bit longer - meaning more stable personal gains vs. PE where you might be shown the door in 2 years?

Feb 12, 2018

Yeah I definitely have seen PE folks move into more senior VC roles, although I'm going to emphasize the "different flavors" point I made earlier. Some VCs don't like having anyone who isn't an entrepreneur while others prefer finance professionals so being targeted in your networking is key.

VC at the associate role is also a 2-year and out program usually. Personally I would choose VC simply because I find it more interesting. There's something to be said about being able to have interesting conversations with friends that aren't in the industry and actually enjoying the discussion! I also believe I would rather work on something that I like to actively ponder and think about in my spare time

Feb 12, 2018

I agree with a lot of what was said here, but it is increasingly more difficult to get into VC than it is PE. It will be difficult because PE has recruiting cycles whereas VC is a lot of luck and who you know. If you are not already doing VC work e.g. sourcing, meeting founders/VC's, building your brand, it might be difficult to enter the space.

If you really have the opportunity to go with a solid PE, I'd consider that --> vc as the recruiting process could take years to pan out. My $.02

Feb 13, 2018

Couldn't agree more around barriers to entry to VC - as a consultant though, PE is a tad bit harder and VC a tad bit easier vs. IB exit, making both equal (equally hard)

Here's a twist - If you had the opportunity to go with a solid PE (Bain Cap / Advent etc.) vs. the chance to go to a solid VC (Bain Capital Ventures / Accel), which one would you go for? Of course, in absolute, the solid VC AUM will be orders smaller than the solid PE, as will the comp.

Feb 14, 2018

That is a really difficult question as PE comes with a more secure lifestyle. I'd probably choose VC because that's where my interests lay. Like you said, VC will be difficult no matter what. If you really want to do it. I suggest you start researching a topic, write a thesis, go to events and meet people organically, then share with them your thoughts. The recruitment process is difficult and often times non existent.

Unless you're a TMT banker at GS, or a truly differentiated candidate, no one is going to come knocking at your door. Start doing the grunt work and it could happen.

Best Response
Feb 13, 2018

Ignore the cyclicality or temporal consideration of which is more attractive today. Focus on what matters to you and why. The ability to switch from one to the other or vice versa as your career matures will be a function of your network, how articulate you are, and your charisma.

Success in venture is very different than success in buyouts. @computercomputercomputer touches on the difficulty.

computercomputercomputer:

The problem with VC is that given the unknowns, I find it very hard to believe one can really perform a rigorous analysis of a business -- and even a product -- despite what everyone likes to pretend. I work in strategy at a large technology firm: it's hard to get it right. Doing this with a startup, unless you have extremely deep domain expertise, seems especially difficult.

I'd modify this to say that the power law in terms of caliber of thought that smart venture investors bring to the deals in their portfolio is extreme. Let me unpack that. I am not saying a brilliant venture investor is standard deviations more intelligent than his PE counterpart. I am saying that similar to how there is a difference between a .308 round and a .457 magnum, so there is a difference in how the most insightful venture investors think about analyzing a business and its market opportunity. Further, within the type of thinking that's necessary for the logarithmic success outcomes you see in venture investing, there's a massive J-curve between the truly great guys and the good ones, then even larger separation between the good guys and the weak ones.

All of that is separate from how critical the team founding the startup is, so another huge driver of success in venture is how 'people smart' an investor is as that predicates your ability to support the founders through all the inevitable hurdles that pose a new life-or-death threat every other week for the first five years.

Founder fatigue, messy personal life issues (infidelity, breakups, divorce, unexpected children, expected children, major health issues, parents' death ...), disagreements over very senior hires, tough business steering decisions, general stress ... these are all things that you don't see written about on Medium much but are real-world things that put the working relationship between the two, three, or four people who started the company under duress.

Venture investors move fluidly between therapist, coach, cheerleader, adviser, headhunter, and house dad. One unfortunate side effect of the inverted pyramid that VC firms look like is that associates don't get to see all the weighty conversations within the partnership about how all of that goes down, so most people are simply unaware of its very real and very meaningful existence.

PE, on the other hand, is a really transaction-oriented profession. You aren't making magic soup by prognosticating about the future, you're buying stable businesses with healthy growth prospects. This means financial acumen plays far more central a role than anything else. That's not to say that EQ is irrelevant, just that it's not the massive requirement it is in venture.

You should figure out where your natural or learned strengths lie, then plot those strengths against your interests. If there's little gap, wonderful, you're in alignment and can make a decision based on what fits in that great overlap of strength and passion.

If there is a gap, your career choice should include intermediate steps that help you acquire or hone the strengths necessary to unlock a long-term outcome where you're in a role that fits your interests or dreams.

In short, you're thinking about this from the wrong end. Invert your mental model. Make a decision outside of temporal considerations like comp in the first role (the one that's more favorable today could be way less favorable in five years), promotion trajectory (if you have to do an extra year at three different titles of seniority, so what, you "lost" only three years to get to the apex title that you'll sit in for two or more decades), and exit potential.

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Feb 14, 2018

First - thanks a LOT. This is immensely helpful. I cannot thank you enough. Working through your points:

APAE:

Success in venture is very different than success in buyouts. @computercomputercomputer touches on the difficulty.

computercomputercomputer:

The problem with VC is that given the unknowns, I find it very hard to believe one can really perform a rigorous analysis of a business -- and even a product -- despite what everyone likes to pretend. I work in strategy at a large technology firm: it's hard to get it right. Doing this with a startup, unless you have extremely deep domain expertise, seems especially difficult.

I'd modify this to say that the power law in terms of caliber of thought that smart venture investors bring to the deals in their portfolio is extreme. Let me unpack that. I am not saying a brilliant venture investor is standard deviations more intelligent than his PE counterpart. I am saying that similar to how there is a difference between a .308 round and a .457 magnum, so there is a difference in how the most insightful venture investors think about analyzing a business and its market opportunity. Further, within the type of thinking that's necessary for the logarithmic success outcomes you see in venture investing, there's a massive J-curve between the truly great guys and the good ones, then even larger separation between the good guys and the weak ones.

This is extremely worrisome, in a slightly tangential way. Coming from an analytical / STEM background makes one relatively comfortable with numbers. Such a person would worry that they have no signals of success in two fronts - (a) sourcing and (b) the ability to be in the good / great part of the curve.

The reason is simple - if someone knows they can work through analysis / due diligence / modelling and is willing to put in as many hours as required - they can feel comfortable that they won't be terrible at PE. Historic track record predicts, to some extent, future returns.

With VC, all of that goes out of the window. No idea if they'll be good at sourcing. Maybe local entrepreneurs will hate them. No idea if they will be able to give the right advice, especially with lack of very very deep domain expertise. However, one never knows till one takes the leap.

APAE:

All of that is separate from how critical the team founding the startup is, so another huge driver of success in venture is how 'people smart' an investor is as that predicates your ability to support the founders through all the inevitable hurdles that pose a new life-or-death threat every other week for the first five years.

And then you turn to the other point (as above)- EQ and the ability to become a "trusted adviser". No signal at all about future ability to do that

APAE:

PE, on the other hand, is a really transaction-oriented profession. You aren't making magic soup by prognosticating about the future, you're buying stable businesses with healthy growth prospects. This means financial acumen plays far more central a role than anything else. That's not to say that EQ is irrelevant, just that it's not the massive requirement it is in venture.

You should figure out where your natural or learned strengths lie, then plot those strengths against your interests. If there's little gap, wonderful, you're in alignment and can make a decision based on what fits in that great overlap of strength and passion.

If there is a gap, your career choice should include intermediate steps that help you acquire or hone the strengths necessary to unlock a long-term outcome where you're in a role that fits your interests or dreams.

In short, you're thinking about this from the wrong end. Invert your mental model. Make a decision outside of temporal considerations like comp in the first role (the one that's more favorable today could be way less favorable in five years), promotion trajectory (if you have to do an extra year at three different titles of seniority, so what, you "lost" only three years to get to the apex title that you'll sit in for two or more decades), and exit potential.

Completely understand - this is brilliant advice. Realise that I've thought about it entirely wrong at this point.

I think the biggest question would love your advice on - how do you think about the lack of signal for future success VC. Even if one is personable and is not EQ-deficient, there are limited signals that a consultant / banker would be good at this job. Those signals are stronger in PE - having done commercial due diligence and the like. This is the "present" view.

Turning to the "future" view - these skills (which one doesn't have a signal on) are critical skills - the ability to source and the ability to deal with founders / operators. You need to be great at this as a partner anywhere - IB / Consulting / PE / VC. From that perspective, it is almost better to test those waters young and early.

What do you think? Once again - thank you!

Feb 16, 2018

Your penultimate line sums up everything I think about this. It's better to discover earlier in your career whether you're someone who can make it work in such an unpredictable field.

Would you rather wait until you're 36, eight years out from your MBA program, recently married, and maybe with a kid or two already out before potentially risking your seven-figure annual salary, bonus that's a multiple of that, coveted seat near the top of a skinny pyramid, and all the attendant social fallout that could accompany failure ... or try it in your 20s when your comp hasn't yet really taken off, you're more geographically agnostic, and effectively free of any familial or personal commitments?

You can make this as academic of a decision as you want (a path you're balls-deep in already, for the record), or you can rely on a more lightweight mental model of which route is costlier tomorrow and thus smarter to explore today.

You're correct that you can't get signals on your future success, so the simple answer is to walk down the path that reveals those signals to you en route. Make sure you stay heads-up and observe the signals diligently, and pair that with a strong stomach so you don't abandon course too quickly. In plain English, if you're interested in venture, do it early and don't quit within at least one year, ideally two.

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Feb 16, 2018

Thanks for this post. Can you shed some light as to how you positioned yourself to brand yourself in the VC space as a consultant? I'm trying to make a similar move in the next few years (in my first year of consulting). Currently, I'm a big 4 tech consultant with some exposure to strategy projects (none related to finance). I may have an upcoming M&A engagement opportunity. I'm trying to understand what skills I should be building on, and what projects I should be exposing myself to, in and out of work.

Feb 21, 2018

Also, the breadth and exposure you get from 'M&A' projects in Big Four consulting wings differ immensely from what you'd get to experience working at even a small 10 person Investment Bank. Most M&A projects in Big Four deal with post-merger integration strategy. The M&A strategy project I worked on (alongside S&O colleagues) focused on coming up with a 'strategy' around the integration of technology systems within the two businesses, so we could then sell a long term integration project so our SI folks (System Integration) could come in and handle that work over a 2-3 year period. The work isn't 'sexy' and its very downstream to build any transferable skills to PE or IB.

Furthermore, M&A projects at Big 4 would actually take you further away from your goal of working for a VC fund as you would then be a few steps removed from getting any hands on experience with cutting edge technology. You'd be better off trying to get on a tech project focused on applying ML algorithms to improve a client's business processes, or working with a client to implement a Blockchain application, or getting deep-knowledge of a particular technology/domain.

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Feb 22, 2018

Thanks for the response, and for bringing that up. My academic background and projects in consulting so far have been around machine learning and big data modernization. That's been my niche for the past 2 years now, and I was afraid that it was actually taking me away from VC. Don't get me wrong, overall, i think my space is really cool, I'd just like to get exposure to how more strategic decisions are being made in the start up space in my niche. How can I brand my tech background as a value add to a VC firm pre-MBA without a finance background, i think my bigger question is, where would i fit in a VC firm? Should I pivot to more strategy based analytics projects?

Feb 25, 2018

Thank you, I'll look into that

Mar 11, 2018
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