Jun 18, 2024

How PE Firms Are Becoming More Like VCs

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Private equity and venture capital firms have played in very different sandboxes for decades. PE firms focused on big, established companies, while VCs took risks on startups and small businesses.

But things have changed.

Now, many PE firms are keenly interested in and looking at smaller, earlier-stage companies, much like VCs. This shift is creating new opportunities for PE firms to create value and improve the performance of their portfolio companies.

What brought about this expansion and desire for smaller fish?

In the last few years, there's been a big change in how many private equity firms invest. They used to put their money into big, well-established companies worth over $500 million. Small businesses and startups, seen as risky, were usually ignored in favor of safer bets. VC firms, therefore, primarily reigned in the early-stage investment phase.

However, the remarkable success of tech startups has reshaped perceptions, demonstrating the potential for rapid growth and substantial success within smaller ventures.

This newfound potential has captured the interest of private equity firms, prompting a significant increase in their pursuit of smaller-scale deals. Recurring data from Pitchbook reveals a rising trend in private equity firms engaging in smaller deals, some valued at less than $25 million.

So, why is there a sudden focus on smaller companies? Well, dealing with passionate founders who are committed to their business is often easier and more rewarding for private equity firms. Also, the acquisition process for smaller companies is usually less bogged down by bureaucratic hurdles, making them attractive investment prospects.

This evolving new trend shows that private equity firms are changing things up. Now, they're not just buying big companies but also checking out opportunities in up-and-coming businesses.

The Concept of Value Creation

One big reason for the ongoing shift is the idea of value creation. Value creation is all about making a company more valuable by improving its operations, products, or market position.

A lot of private equity (PE) firms have started putting together special teams focused on helping the companies in their portfolios to grow and thrive. These teams work really closely with the companies they invest in, providing guidance and support to boost performance. It's kind of like what venture capitalists (VCs) do, but PE firms are bringing their own expertise in scaling businesses to the table.

Consider this: Our company, Proven, is a private company with no outside funding, but we have received several calls from PE firms interested in buying it. These firms see the potential to take Proven to the next level and then sell it for a much higher price. It's not the VCs making these calls; it's the PE firms. This shift shows that PE firms are now interested in smaller, high-potential companies.

Why Smaller Companies Are So Attractive

Smaller companies, especially those backed by passionate founders, have become more appealing to PE firms for several reasons:

  1. Value Potential: PE firms see a lot of value in these companies. They believe they can make them more efficient and profitable.
  2. Direct Dealings: By dealing directly with founders, PE firms can avoid the inflated prices that sometimes come with VC-backed companies.
  3. Flexibility: Smaller companies are often more flexible and can be scaled up quickly with the right support.

New Opportunities for Visionary Founders

It's not just the private equity managers who are accelerating this trend. Many founders are showing keen interest as they learn of the new opportunities opening up to them.

In the past, founders who wanted to grow their companies had limited options. They could either take VC money or struggle to find funding. Now, with private equity firms showing interest, founders have more choices. And with these choices comes the ability to exponentially drive revenue growth within shorter timelines with more capital power.

Founders can now decide whether to stay private and grow exponentially with the help of a PE firm or take the traditional VC route. This competition between PE and VC firms is good for founders, as it gives them more options and potentially better terms.

Building the Best Value Creation Teams

In most competitive landscapes, it's common to hear the phrase 'May the best man win.' Well, in the PE VC battlefield, the best man is likely the firm with the best deal for the founder. For private equity teams, they are leveraging the strength of their value creation teams and their more robust value creation plan to court and win over the founders. These teams are crucial for helping portfolio companies perform better.

A strong value creation team can make a big difference in how a company grows and succeeds.

Wait, isn't that a venture capital investment strategy? Aren't venture capital firms the ones that usually offer support after investing, beyond just raising funds? Yes.

And now, private equity investors are entering the scene with a lot of resources, providing more support than most venture capital firms can afford.

These sophisticated investors are now highlighting their value creation teams as a key selling point to founders. They are saying, "Our team is the best. We have the expertise to help you grow."

From the perspective of the small business owner, becoming part of a portfolio company and being backed by management teams that have way more resources, skills, and expertise across all domains is perhaps a deal too good to turn down. And we can see why data shows an upward trend in more private equity deals of smaller sizes.

This focus on value creation is a big part of why PE firms are becoming more like VCs and perhaps even winning over deals from the startup ecosystem.

Practical Steps for PE Firms

If you're a CFO or a senior decision-maker in a PE firm, and you're in the process of expanding to this new pool of opportunity as well, here are some practical steps to embrace this new approach and make your portfolio companies perform better:

1) Build Strong Value Creation Teams:

In private equity, value creation is about assembling the dream team that can provide expert guidance to your portfolio companies. These experts should have experience in scaling businesses and elevating operational efficiency so they can grow faster with fewer constraints.

2) Look for High-Potential Smaller Companies:

It's time to stop focusing solely on big, established companies. Look for smaller businesses with high growth potential. Often, these smaller companies have strong cash flow and consistent revenue growth projections. With the right investment, advice, and support from your value creation playbook, such companies can offer great returns as you help them scale.

3) Develop Direct Relationships with Founders:

Work directly with company founders. This can help you get better deals and avoid the high valuations that sometimes come with VC-backed companies.

4) Provide Hands-On Support:

Be ready to provide hands-on support to your portfolio companies. This can include everything from operational improvements to strategic guidance. Your portfolio company's management team should feel and benefit from the full power of the resources, capital, talent pool, and leverage that your firm can bring for successful execution.

5) Leverage Technology and Data:

Use technology and data to identify opportunities for improvement. This can help you make better decisions and provide more effective support to your portfolio companies.

Benefits of This Approach

Cost Savings

PE firms can achieve significant cost savings by focusing on value creation and working closely with portfolio companies. Some of the tactical value creation strategies can include streamlining operations, improving efficiency, and negotiating better deals with vendors and suppliers.

Increased Value

Strong value creation teams can help portfolio companies grow faster and become more valuable. This can lead to higher returns when the company is eventually sold.

Competitive Advantage

PE firms that embrace this approach can gain a competitive advantage. They can attract better deals and build a reputation for being more sustainable and invested in helping businesses truly succeed in the marketplace.


The lines between PE and VC firms are quickly blurring before our eyes. PE firms are now looking at smaller, earlier-stage companies and focusing on value creation. None of us could have predicted this shift, and yet, it is here, rapidly opening up new opportunities for smaller businesses and entrepreneurs that many have only dreamed of.

As a CFO or senior decision-maker in a PE firm, embracing this new approach can help you achieve new heights of success for your firm, unlock the hidden potential in your portfolio companies, and drive them to success.

Remember, the key is to see these smaller companies not just as investments but as partners. By providing the right support and resources, you can help them grow and thrive, benefiting both your firm and the companies you invest in.

So, take a closer look at those high-potential smaller companies and see the value they can bring. The future of PE is about more than just big deals; it's about creating value at every level. If you're wondering how to get started, we recommend exploring the development of a value creation plan and assembling the team that will help you prove your investment thesis.

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