In the case where $C$ is essentially small, $\hat{C}$ is equivalent to $[C^\text{op}, \mathbf{Set}]$; in general, it is a certain full subcategory.
Let me make this statement precise, as it is actually the tricky part.
A presheaf $H\colon C^\text{op} \to Set$ is called small if $H = \mathrm{Lan}_JF$ for some full inclusion $J\colon D \hookrightarrow C^\text{op}$. Equivalently, a presheaf is a small colimit of representables (in a bigger universe). Roughly speaking, $H$ is determined by a small full subcategory of $C$.
Then, the category $\mathcal{P}C$ of small presheaves with natural transformations forms the free cocompletion of $C$ via the usual Yoneda embedding. This gives you the left biadjoint to the forgetful functor $U\colon \mathbf{ConCAT} \to \mathbf{CAT}$ where $\mathbf{ConCAT}$ is the 2-category of large categories with colimits as objects, cocontinuous functors as 1-cells, and natural transformations as 2-cells; $\mathbf{CAT}$ the 2-category of large categories. In addition, the forgetful functor is also (pseudo-)monadic. The pseudomonad can be a strict 2-monad if a choice of colimits is given.
Small functors were introduced as accessible functors in (Kelly, 1982), and the monadicity of cocompletion can be found in (Kelly & Lack, 2000).
- Kelly, Basic Concepts of Enriched Category Theory, 1982
- Kelly and Lack, On the monadicity of categories with chosen colimits, 2000