Which Investor Fits Your Company’s Stage?

Investors in companies fall into four categories: Venture Capital (VC), Private Equity Group (PEG), Strategic, and Grave Dancer. Each one specializes in a certain stage of company growth. Read on to find the right investor for your company. To learn about the tools they’d use to value it, see How Investors Value Companies.

Introduction

Like people, companies progress through four broad stages—Startup, Growth, Maturity, and Decline. Investors specialize in these stages. Put another way, they specialize by degree and type of risk.

And for people and companies alike, the older they are, in general the more predictable their future. The passage of time lays down a track record of operating and related financial data that provide rich clues regarding expected cash flow. That holds even when the data predicts the company’s demise.

A Quick History of the Four Main Investor Types

VCs focus on late Seed-to-Growth stages. (Seed investors play in the earliest stages, and many of them are individual, not institutional, investors. We’ll focus below on institutional investors, those with established offices.)

Only 10% of startups become profitable, so a company’s beginnings are characterized by risk everywhere, all at once. Seed VCs’ median investment is $3.5 million. The median investment by Series A (early growth) VC investors is $8 million, and their Series B funding for mid-growth companies is about $14 million or more.

PEGs pick up the baton in the much more predictable, late Growth to Maturity stages. Surprisingly, they make about 30% of their lower mid-market portfolio companies unprofitable in their initial years due to acquisition-related debt, aggressive growth targets, and management fees. But most limited partners (investors) in established PEGs still earn an attractive long-term return: they achieve an average compounded ROI of 10% when they sell their portfolio companies.

Strategics also focus on the late Growth-to-Maturity stages. But they rarely load debt on their targets, so leverage isn’t a risk. Instead, they run into problems integrating their targets and overpaying due to overly optimistic synergy expectations. For those reasons, more than two-thirds of their prior acquisitions fell short of an acceptable ROI (defined as 7%-8%). But things are looking up for Strategics: now, only a third stumble. They learned to sidestep many of the usual integration traps, most importantly, culture conflicts.

Grave Dancers focus on the Decline stage, which follows “Maturity” or “Harvest” in the chart above. Dancers are mostly specialized hedge funds and PEGs, but also, less commonly, turnaround artists and management insiders. Because relatively few lower mid-market communications and Internet-based companies (like our clients) emerge from bankruptcy intact, I won’t spend much time below describing Grave Dancer activities.

What VCs Do

They act as sales sherpas, financing, and to some degree, guiding their investees from Launch or Seed to rapid Growth. Nearly all their money goes directly into their targets to support salaries, product R&D, production, and marketing. They don’t cash out founders; they fund them. VCs also aren’t usually interested in buying control, since that would threaten the founders’ “animal spirits” and, if things go south, require a larger write-off. So technically, VCs aren’t acquirers.

To value zero-stage startups, VCs are initially forced to rely on non-financial metrics like:

• Management quality (For the characteristics exhibited by successful young company management teams, see our The 14 Predictors of Startup Success).
• Market size and quality.
• Value-add opportunity. Whether the VC has relevant expertise and can make meaningful contributions to the company’s success.
• VC community interest. Are other reputable VCs willing to invest? 

Assuming a start-up passes this initial four-part test, VCs estimate what share of its addressable market the company might capture. Finally, to understand pricing and unit costs, they search for data on similar, revenue-generating companies and conduct primary research on user behavior. Very occasionally, the market opportunity is so large that VCs don’t fuss with price and cost details. Pinterest’s VCs for a long time simply poured money into boosting website traffic, a decision that proved correct.

When a young company achieves its first sales, that moment greatly reduces uncertainty, whether the news is good or bad. The focus VCs place on sales is evident from their use of sales multiples to value a business. See Eqvista for interesting sales multiples by industry.

Of course, even sales data doesn’t eliminate most uncertainty, because costs remain a mystery that can only be resolved through execution and scale. In young companies, expenses are inflated by one-time expenditures, low-volume supplier purchases, weak learning efficiencies, and limited brand recognition, among other factors.

For further insight into what VCs consider when making early-stage investments, see more insights in a Harvard Business Review article, How Venture Capitalists Make Decisions.

What PEGs Do

PEGs are primarily financial engineers who use leverage and industry consolidation to increase the value of targets that sit in the later Growth to Maturity stages. They have themselves evolved over the years through three distinct stages:

Version 1: Add Value by Finding Cash Cows

The first PEGs targeted cash-heavy companies with excess debt capacity, used that very capacity to buy them, then used more of it to distribute dividends to themselves. They figured, if their targets couldn’t figure out what do with all that cash, they could. So was born the LBO era, and its first target, incongruously, was staid Hallmark Cards.

Today, PEGs are still mostly interested in: 1) minimizing the amount of their own cash when buying a target (relying instead on bank debt collateralized by the target’s own assets and cash generating capacity), and 2) then maximizing target cash flow. Doing this requires financial modeling expertise.

Version 2: Add Value Through Cost-Cutting, Then Consolidation

After exhausting the ranks of slow, hidebound LBO targets in the late eighties, PEGs began focusing on cutting target costs after purchase. That was followed by leveraging economies of scale to boost margins. They gained scale first by acquiring companies to serve as industry SG&A “platforms.” Then they acquired smaller companies, “add-ons,” which they integrated into those platforms. Such PEG-driven industry consolidation continues to this day in nearly every industry.

Version 3: Add Value Through Operations & Strategic M&A

Modern PEGs, driven by intensifying competition as the industry grows crowded, are becoming more creative and operationally focused, seeking new ways to grow revenue and margins. They:

• Specialize by industry
• Take weakly-managed public companies private
• Invest in portfolio company sales and margin-widening initiatives, something they rarely did before
• Scan for M&A targets in industries adjacent to those of their portfolio companies. It’s riskier than buying direct competitors, but it delivers incremental scale
• Look for platforms abroad

All this value-building has a deadline. A PEG’s offer is capped by what it hopes to resell the target for in about five years. A Strategic isn’t selling, so no such ceiling applies.

What Strategics Do

Strategics are operating companies that, when they acquire a target — typically one in the later Growth to Maturity stage — integrate it and therefore plan to hold it indefinitely.

PEGs and Strategics compete, and Strategics still account for at least half of M&A deals as measured by both the number of transactions and total dollar value. However, PEGs have been closing the gap. Thirty years ago, they accounted for only 3% of acquisitions.

One of the reasons for their growth is their huge overhang of “dry powder,” or unspent limited partner funds that are now worth somewhere between $2 to $4 trillion.

The accepted wisdom is that Strategics pay higher acquisition multiples than PEGs. That holds in the IT-related lower mid-market we serve. Across all industries, though, PEGs have on average paid more since 2012.

Aside from valuation, Strategic and PEG deal structures are markedly different. Strategics’ offers are more relevant to owners of targets looking to exit relatively soon. PEGs’ offers are more appealing to those who aim to fully exit five years later, when the PEG resells the company.

How Strategics value targets is also more of a mystery than how PEGs do it. While both use net present value (NPV), Strategics also consider synergies unavailable to PEGs’ stand-alone portfolio companies.

Last, Strategics also typically fund acquisitions from their own balance sheets rather than using borrowed money. So, when debt is expensive, they can both offer more than a PEG for the same company and carry less risk that the deal collapses due to lack of funding.

What “Grave Dancers” Do

They scan the graveyards of bankrupt companies, looking for ways to resurrect value amid the ruins. About half of the companies that enter bankruptcy reorganize and emerge as going concerns, often with the help of Grave Dancers who buy out creditors and inject fresh cash.

Approximately 70% of rent-generating real estate companies survive bankruptcy, as do 65% of telecom/media companies with valuable broadcasting licenses and brands.

Unfortunately, bankrupt software and SaaS companies have among the lowest survival rates, only about 30%. Their customers hesitate to subscribe when the future is unclear; investors don’t see much value in their intangible assets; and their tech talent quickly moves on.

In the absence of going business value, asset “fire sales” return as little as 5% of the company’s depreciated value. For distinctions among the types of assets sold in each type of bankruptcy, see Investopedia’s entry.

Yet as dark as auctions of bankrupt companies’ assets may be, entrepreneurial Grave Dancers still extract value from them. Sam Zell built a fortune on real estate. Brooks Brothers, Pier 1, Sharper Image, and Lilly Pulitzer had strong trademarks.

In Short

• VCs buy revenue potential. Their money goes into the company, not to its founders, and they exit to a PEG or a Strategic once growth begins to slow.
• PEGs buy cash flow they can improve. They use debt to fund the purchase, cut costs, add scale through acquisitions, and sell in about five years — often to a Strategic, sometimes to another PEG with a younger fund, and very occasionally to the public.
• Strategics buy a fit with what they already own. They pay for synergies that may be difficult for somebody outside the company to see, use less debt, and plan to keep what they buy.
• Grave Dancers buy pieces like IP or real estate property. It’s rare for a declining mid-market company to be prominent enough for the whole to be worth more than the parts.

Wrap-Up

Of interest to readers with Growth and Mature companies, there’s a range of acquirer subtypes you may encounter while exploring an exit. Check out Your Best Acquirer.

Got questions about what sort of investor might fit your company? Email us.
Article revised 8/13/26. © 2026 Kuhn Capital, Inc. All Rights Reserved