If you’ve followed Presidential politics of late – and as much as I want to look away I find myself gawking at a freeway pileup – you have no doubt heard a lot about private equity and venture/vulture capital. The good news is that much of what you have heard is not true; which, I suppose, is also the bad news. Herewith a brief attempt to provide a little clarity.

First, in a very technical sense, venture capital (VC) is a kind of private equity (PE). Both terms refer to pools of capital assembled by professional management/investment teams from wealthy individual and institutional investors in private offerings. However, in a practical sense, the VC business is fundamentally different from the PE business. As for “vulture capital,” the term is more of a slogan than a description of a business, but to the extent it somehow describes a business strategy it more often than not makes its appearance in the PE world.

Now, VC and PE investors are both out to make money; in fact, they are both out to generate returns that exceed the returns typically available in public securities markets. They both look to generate those returns by investing in businesses with higher risk/reward profiles than those that make up the vast bulk of securities on the major public stock exchanges. But as to how they expect to generate those returns, VC and PE are typically worlds apart.

Fundamentally, VCs make money by building new businesses. PE investors, on the other hand, generally make money by restructuring existing business. VCs are “clean slate” investors in the sense that they typically invest in young businesses with little or no track record with the expectation that those business will become “the next big thing.” Think Google, as an example of a VC deal that worked, and, say PetCo as a VC deal that failed. PE investors, on the other hand, generally invest in established businesses that have fallen on hard times, or are otherwise perceived as not performing to their potential. Think Hertz as a PE deal that worked and, say, Sears as a PE deal that (so far) has not worked very well.

Some more differences. VCs typically do not assume operating control of the businesses they invest in. They are active investors, to be sure, but fundamentally investors, not managers. PE investors, on the other hand, typically see themselves not as supporting but rather as taking over management of the businesses they invest in. VCs typically invest in businesses with no debt, or in later stage investments with limited debt. PE investors, on the other hand, usually leverage their equity investments by having the business take on debt that substantially exceeds the amount of equity the PE firm invested. Thus, most PE investments are in the form of “leveraged buyouts” or “management buyouts.” Finally, if and when a VC-backed company achieves an exit for its VC investors, the company will almost certainly employ more people, usually a lot more people, than when the first VC money was invested. In contrast, if and when a PE-backed company achieves an exit for its PE investors, the business will more often employ fewer people than it did when the PE investors first entered the picture.

While I have spent most of my career in and around the venture capital world, I am not going to argue that VC investing and investors are somehow better or worse than PE investing and investors. They both have their place, which, I think, can be summarized as follows: VC is about creating new value in new vessels, while PE is about salvaging value otherwise locked up in old, deteriorating vessels. The strongest economies excel at both.