The Strategic Blueprint Behind Value Creation in Venture Capital & Private Equity

Introduction

The value of a company hinges on its scale (measured in units such as sales or EBITDA), its quality, the price buyers are willing to pay per unit of scale (e.g., price-per-crore of EBITDA), and, in certain cases, its breakup value.

To generate profits for their investors, GPs focus on increasing the scale of companies, improving their quality, raising the price buyers are prepared to pay per unit of scale, and, occasionally, transferring wealth from the companies to individual investors.

GPs in VC/PE employ six broad strategies to create returns on their investments. The value bridge analysis in Chart 1 below offers a visual summary of how these strategies contributed to an actual Growth PE transaction. In this example, the majority of the exit gain came from increased sales (larger scale), followed by an improved valuation multiple (higher price-per-unit), and enhanced efficiency reflected in a stronger EBITDA margin (improved quality).

Chart 1: Value Bridge Analysis

The significance of each strategy and its typical contribution to total returns in a VC/PE investment varies depending on the company’s growth stage.

Moreover, individual GPs may favour specific combinations of these strategies based on their unique expertise and experience.

At Oister, we believe that understanding which strategies are most relevant at different stages of a company’s growth—and which strategies individual GPs favor—provides critical insights for managing VC and PE investments effectively.

Description of the Six Strategies

Table 1 below summarises the six strategies employed by GPs:

1. Organic Revenue Growth

   Organic revenue refers to the revenue generated through a company’s own operations, as opposed to revenue acquired via M&A. GPs aim to achieve greater scale by driving organic growth. To boost sales, GPs may identify new markets, introduce new products, or leverage their networks to connect companies with potential buyers. Organic revenue growth plays a pivotal role in driving EBITDA growth and is a critical contributor to returns at all stages of VC and PE, except for LBOs.

2. Inorganic Revenue Growth

   Inorganic revenue is added through acquisitions. GPs help their companies scale by identifying and executing acquisition opportunities. These acquisitions enable faster scaling and often improve margins by eliminating duplicate operations.

3. Efficiency Gains

   EBITDA can grow through increased revenue or enhanced efficiency. GPs work closely with companies to identify and implement efficiency improvements. For instance, optimising supply chains can reduce production costs and enhance gross margins, while cutting operating costs such as rent, utilities, and labour can boost operating margins.

4. Valuation Multiple

   The valuation multiple represents the price investors are willing to pay per unit of a company’s operating or financial metric (e.g., sales or EBITDA). For mature companies, metrics like earnings inform well-known ratios such as Price/Earnings (P/E). For earlier-stage companies, Price/Sales may apply, while for very early-stage ventures, valuation multiples are intangible and based on perceived potential and probability of achieving scale.

   While valuation multiples are heavily influenced by market sentiment and largely outside GPs’ control, they can still employ strategies to enhance these multiples. For example, they might collaborate with successful repeat entrepreneurs, onboard respected investors, secure contracts with prominent brands, or achieve growth milestones. Larger companies also tend to command higher multiples, so GPs often focus on scaling companies to a size where a step-up in the valuation multiple adds to investor returns.

5. Leverage

   A company’s capital structure affects both its return on equity and risk profile. Higher debt-to-equity ratios can amplify returns during profitable periods by distributing profits among fewer equity holders but increase risk during downturns due to fixed debt servicing costs. The use of leverage typically increases as companies grow larger and their cash flows become more predictable.

6. Cash Extraction

   Cash distributions transfer wealth from the company to its investors through dividends or share buybacks. This strategy is most suitable for companies with excess cash reserves that are not required for reinvestment in the business.

   As the examples below illustrate, GP’s typically employ several strategies in each investment.

   

Use of the Six Strategies at Different Stages of Growth

Chart 2 provides a broad indication of the relative importance of the six strategies across the VC/PE spectrum. Since there isn’t a perfect alignment between company growth stages and these strategies, the chart serves as a general guide.

At the Seed stage, a company typically has a vision but is still exploring product-market fit or conducting research. Without a defined business model or accounting metrics, valuation hinges on the strength of the vision—market potential, founder expertise, and the credibility of financial backers.

As the company begins generating revenue, it signals proof of demand and validation of its vision. Early revenue growth is often organic, driven by the company’s own activities. Organic growth remains a key strategy and a critical contributor to returns across all VC stages and into mid-cap PE.

Once the business model solidifies—complete with a clear go-to-market strategy and established unit economics—the company can start exploring acquisitions. This clarity, typically achieved by Series-C, allows a company to pursue both organic and inorganic growth through M&A. Acquiring other businesses can boost revenue and enhance margins by reducing duplicate costs during consolidation.

As companies scale, investors begin to shift focus beyond sales volumes to evaluate the quality of recurring revenue. This includes assessing production costs and operational efficiency. By this stage, the market for the company’s goods or services is proven, but competitiveness and sustainable margins become critical. Operational efficiency becomes a key focus for later-stage VC-backed companies and remains a significant strategy for PE firms acquiring mature businesses.

Debt plays a role in creating value for equity investors at all stages. For instance, early-stage VC-backed companies in Series A often utilise venture debt to fund growth while minimizing equity dilution. However, active capital structure management gains prominence only when companies have predictable revenues and sufficient scale for lenders to underwrite. This typically begins around Series D-E for VC-backed companies. In PE, debt is a value-creation tool at all stages and becomes a dominant strategy in leveraged buyouts (LBOs).

The final strategy—extracting cash through dividends or share buybacks—is viable only for mature companies with steady cash flows and surplus funds that aren’t needed for reinvestment. Growth-focused companies, from early stages through growth PE, are less likely to have large surpluses for distribution. Consequently, cash extraction is predominantly employed in large PE strategies, especially LBO funds.

Frequently Asked Questions