Reimagining the Startup Playbook: A Hybrid Approach to Venture Capital and Private Equity


Written By: Krista Morgan, General Partner

The startup landscape for technology companies has evolved rapidly over the past few decades, giving rise to well-established playbooks for venture capital (VC) and private equity (PE) funding. However, as the volume of early-stage tech companies continues to grow exponentially, these models are increasingly falling short, leaving many founders struggling to succeed. In this blog, we explore the benefits of a hybrid approach that combines the strengths of VC and PE.

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The Venture Capital (VC) Playbook

The modern technology industry, though less than 25 years old, has revolutionized the ease of building globally impactful businesses. Over the past two decades, a well-defined VC playbook for creating a successful technology company has emerged:

1. A visionary founder has a groundbreaking idea.

2. Leading venture capitalists (VCs) back the founder.

3. VCs provide essential connections, human resources, and capital.

4. The founder recruits top talent, invests heavily in product development, and rapidly captures market share, often selling at a loss funded by VC dollars.

5. The company matures, builds a path to profitability, undergoes an IPO, and continues to grow and innovate.

This model has proven extremely effective for a select few founders and the VCs who support them. However, its success is far from universal. The VC model is constantly focusing on winners and companies are regularly left behind when they don’t meet growth expectations.

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The Private Equity (PE) Playbook

In recent years, private equity firms have moved away from focusing solely on buyouts of mature businesses. Here’s what the PE playbook for growth-stage technology companies has looked like for the past two decades:

1. Identify a growth-stage technology company with scale, profitability, and solid unit economics.

2. Invest equity and leverage it 4:1 with debt.

3. Incentivize and pressure the founder to achieve growth without significant cost increases.

4. Aggressively pursue acquisitions to drive inorganic growth and increase leverage.

5. Prepare the company for an IPO.

This model has proven effective for founders and the PE firms who support them. But it relies on getting the company to a certain scale. Many companies pursuing this path also suffer from a bias toward short-term gains at the expense of long-term strategic planning and sustainable value creation.

What happens to the founders that have an idea, receive funding, gain some traction, but for whatever reason cannot raise additional capital or hit enough scale to attract traditional private equity? 

One obvious alternative is bootstrapping, i.e. attempting to survive on your own steam. This approach can work well for businesses with low upfront costs that can generate revenue quickly and grow organically, but less so for those who need expensive equipment or R&D services out the gate. Other alternative approaches include crowdfunding, applying for grants or competitions, or joining a business accelerator.

You can read more about alternative strategies in our recent blog, “When VC Leaves You High and Dry, Consider These Alternative Funding Strategies.”

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The Hybrid Playbook

With so many founders, so much capital, and so many people wanting to build wealth in this technology asset class, it’s becoming increasingly clear that the VC and PE playbooks alone are not sufficient to meet market demand or overcome their inherent limitations.

I believe a hybrid approach is needed, one that might look like:

1. Multiple visionary founders with similar ideas receive funding from various VCs to achieve product-market fit.

2. Companies that aren’t suited for large-scale operations merge to offer more comprehensive solutions to an identified ICP, backed by private equity.

3. Early-stage consolidation creates scale.

4. These consolidated technology companies re-enter the venture track.

The beauty of this playbook is that it allows for parallel exploration of ideas by multiple founders, which is a core strength of the VC model. It also ensures efficient allocation of resources by giving founders the opportunity for early consolidation with similar companies, allowing them to strengthen their chances of success in a highly competitive market. Finally, it offers an opportunity for the consolidated entities to rejoin the venture track for further growth and expansion. 

This hybrid playbook combines the best of VC and PE and offers a powerful solution to the challenges in both models.

Closing Thoughts

Venture funding is often seen as a binary path—either a company becomes a rocket ship or it fails. This setup makes it difficult for founders stuck in the middle to reset their cap table and pursue alternative growth paths. The egos of founders and VCs often hinder progress, as no one wants to admit to potential failures or prepare for them.

But 20 years into this venture asset class, can’t we all agree there is a middle ground?

Why are we throwing away the venture dollars that are funding these companies, throwing away the traction, all because we don’t want to do the hard work?

Maybe the large venture firms don’t have to follow, but the rest of us? 

At Stage, we believe a hybrid approach can go a long way toward unlocking new pathways to success for founders and creating more sustainable, innovation-driven companies in the technology sector.

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