Joash Lee is a Venture Partner at Iron Key. He actively invests in emerging technologies like AI, Web3 and ClimateTech.
What’s the difference between football and tennis? They both involve a ball, require strategy and captivate fans, but at their core, football and tennis are two very different sports requiring different skills—one needs coordination within a team, while the other is an individual test of precision.
Similarly, while venture capital (VC) and private equity (PE) firms are often lumped in the same “finance bucket,” they involve different investment strategies, risk profiles and expertise.
VC And PE: Understanding The Differences
Traditionally, VCs invest in early-stage, high-growth startups with the potential to generate outsized returns. These startups are typically risky investments, usually unprofitable and often capitalize on technological advancements like Web3 or AI. By deploying smaller amounts of capital per deal into a wider pool of startups, VCs spread their risks and rely heavily on the Pareto principle—most investments will break even or fail, but they’re counting on the few that don’t to be successful unicorns.
On the other hand, PE firms tend to invest in mature companies in industries such as manufacturing or retail. By acquiring controlling stakes, PE firms aim to improve profitability through strategic management, operational efficiencies and financial restructuring. Because these deals are later-stage and involve less risk, PE investments are usually larger and focus on generating steady returns rather than explosive growth.
The Gap
Yet, a gap exists between the VC and PE markets. Mid-sized companies with good unit economics and decent revenue growth of ~50% often fail to attract PE firms as they are geared toward growth rather than profitability, having been nurtured in the VC ecosystem but are beyond the scope of VC due to their growth rates and larger funding requirements.
The solution? Some new funds are offering lifelines to companies overlooked by traditional investment models.
The Hybrid VC-PE Strategy
Once two distinct capital markets, the lines between VC and PE have gradually blurred, with some fund managers seeking to acquire underperforming startups with underlying value at attractive discounts. These investors are essentially adopting a hybrid VC-PE strategy, buying mid-sized startups cheaply, turning them around, and making profits from the sale.
The emergence of such VC-PE bridge funds has only been catalyzed by economic headwinds as venture funding continues to be down, with 2024 set to be the second straight year in which VC fundraising is less than half of 2021 or 2022.
A New Landscape
While in its nascent phase, fund managers globally have been doing this. U.K.-based Resurge Growth Partners acquires startups facing difficulties in a bid to turn them around. By guiding startups that need a strategic shift from the VC growth model to that of a profitability-centric PE one, it prepares them for later-stage investments down the line. These startups aren’t “bad businesses” but are rather trapped in a funding conundrum: They’re too small for PE attention but are too big for VC interest.
Likewise, Tikto Capital buys majority stakes in profitable SMEs and tech businesses before helping them scale and, ultimately, exit to PE firms. In Asia, Turn Capital launched its Opportunities Fund, which aims to snap up controlling interests in undervalued companies with potential upsides. Taking advantage of plummeting valuations, such turnaround funds aim to mold targeted firms into profitable businesses before seeking quick exits via acquisitions or IPOs.
Geography-wise, I’ve seen this play out more in the U.S. and E.U. than in Southeast Asia, as the U.S. and E.U. funding ecosystem is largely composed of ex-tech founders who have the expertise and know-how required to acquire and turn around startups. In contrast, I’ve found VCs in Southeast Asia are largely ex-bankers and executives of traditional businesses seeking to drive growth and increase valuations before exiting.
Adaptation And Diversification
A couple of VCs I spoke to have also adopted PE-like strategies as the VC market remains grim, and they vie to stay afloat, and some Web3 funds are considering venturing into trading liquid assets such as DeFi tokens and stablecoins. Through such diversification, these Web3 VCs hope to prioritize immediate returns and minimize risks.
This isn’t surprising as Web3 slowed after spiking in 2023, though it’s picking up again as Bitcoin surges following Trump’s victory. Furthermore, public and private valuation gaps have closed, wiping out early-stage discounts—certain Web3 startups have even raised “KOL rounds” that give influencers better terms than early backers.
But pivoting to something inherently different is easier said than done.
Considerations For Shifting Strategies
Sure, VCs could dabble in PE or trading, but they probably wouldn’t be the best capital allocators. VCs thinking of shifting strategies should consider whether they have the necessary expertise and, if not, partner with investors with the right skill set.
In the case of a VC pivoting to PE, starting a new fund that adopts a “dumbbell approach” might work better than raising follow-on capital for its existing fund to do later-stage investments. Not only would this make the transition more justifiable to limited partners (LPs), but it could also help VCs bridge the knowledge gap with complementary skills, such as complex financial modeling, thus equipping them to invest in later rounds.
The key for teams venturing into fields outside their core expertise is to have the right talent. Case in point, one of the founders of Resurge Growth Partners previously helped build the European PE business of a leading asset manager, and the other co-led a VC investing in high-growth startups across the U.S. and U.K.
Besides pivoting out of VC, fund managers could consider setting up continuation funds, which allow them to “reset the clock” on assets in old funds by selling them to a new vehicle they also control. While more common in PE, some VCs such as New Enterprise Associates and Insight Partners have established such vehicles, giving them an extended runway for returns to materialize amidst funding winters.
As we approach 2025, I foresee VC-PE bridge funds rising to prominence as the consolidation of startups and funds alike continues. Only the strongest will stay, but I think those remaining are poised to thrive. I also anticipate a greater emphasis on cashflows and the path to profitability rather than growth at all costs, and exorbitant revenue multiples are likely to be a thing of the past.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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