What Is The Difference Between Private Equity And Venture Capital?

As different as foresight and hindsight are. Same asset-management bucket, completely different risk profiles, and then some. Vinod Khosla referenced our analysis on Twitter.

Even though venture capital and private equity are both considered part of the private equity asset-class of alternative investments, and both are investments in private company stock, the risk profile between venture capital and private equity could not be more different.

Simply put: venture capital is investing before the chasm (Geoffrey Moore’s book “Crossing the chasm”), while private equity is investing after the chasm.

More specifically, venture capital invests in unprecedented foresight, while private equity invests in an extrapolation of hindsight. Venture capital deploys risk to the determined pursuit of upside, private equity deploys risk along the fragmented protection of downside. Venture capital pursues deep and narrow risk, private equity pursues shallow and wide risk.

It is exactly for the confounding of risk profiles between venture capital and private equity conveniently lumped together in the same asset-class distribution and risk strategy that venture capital has turned predominantly subprime, with its investments today resembling private equity intake criteria unable to yield (on the whole) consistent outlier venture returns it should produce given the massive greenfield available to technology innovation.

Such confounding having a devastating effect on groundbreaking innovation as explained in the first-ever published The State of Venture Capital. Little has changed for the better since.

Groundbreaking innovation, even if it rears its beautifully “ugly” non-conform head, is now met with numbing intake criteria of micro private equity arbitrage on Sand Hill Road, and inevitable tagged as false negatives in the reverb of collusion deployed by financiers fancying to be called venture capitalists.

The systematic dumbing down of the deployment of risk profiles, induced by a system of finance in violation of the most rudimentary principles of freedom exactly the reason why no venture capitalist could see the opportunity for Tesla as early and as rewarding as it should have.

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