Summary
- Make no mistake, these private equity folk are curious, very curious. They want to know everything about what you do.
- Those contemplating a relationship with a venture capital firm must be very clear on what they are looking for, and what they are prepared to sacrifice in order to benefit.
- To acquire a private equity investor is neither simple nor rapid.
More organisations, including family
businesses, are reaching a point where their further growth is
restricted by the availability of capital.
The owners are as ambitious as ever, and the potential in the market for what they are offering continues to be high.
Yes, they can seek loans from banks, but some are now turning to venture capital funds for support.
My
recent experiences with the world of private equity have led me to
share the learning from reaching out to such funds. Those who have done
so typically expect to continue growing at a significant pace, and they
appreciate, however reluctantly, that they can no longer rely on their
own resources and expertise to enable this to happen.
They
wrestle with the prospect of importing talent that complements theirs —
including other shareholders and hence other directors. What? Dilute
their absolute control over the enterprise? Even cede it? Unthinkable?
For many, the majority even, it is. But for the truly brave, who
consider taking the plunge, they know it is a price they have to pay.
So
they identify likely investors, hearing from them about the onerous
conditions they will impose if they are to inject the funds for
expansion.
Make no mistake, these private equity folk are curious, very curious. They want to know everything about what you do.
About the numbers of course, but also about your
customers, your staff, your systems, and perhaps most importantly about
your values and your culture.
To put it bluntly; they
want to know if you can be trusted. Are you telling them the truth —
including the delicate and the inconvenient? Is your operation
transparent and accountable, paying the taxes due, treating staff and
customers fairly?
Are you responsible, reliable characters who will form worthy partners without leading yourself or the investor down?
If you will find it hard to tell a good story, an authentic one, don’t bother approaching a venture capitalist.
If you will find it hard to tell a good story, an authentic one, don’t bother approaching a venture capitalist.
But what about those behind the investment funds themselves? What are their values?
Do
they conform to the stereotype of such outfits, that they are only in
it to squeeze the assets, to shrink the costs and force up the revenues,
so that a few years down the line they can exit with a tidy profit?
Or
are they there as partners, to add value, to build the business so that
it does good in addition to doing well? Will they help you strengthen
your structures and systems? Will they introduce you to new products and
markets? Will they brainstorm on strategies, show you better ways to
manage performance? And be clear on why you approached them and not a
bank in the first place.
There must be a serious
benefit from accepting that their funds will dilute your ownership, at
least for the years when they will be a major if not majority
shareholder.
Vision and values
Or did you imagine they would just pour in cash and let you continue with business as usual?
Those
contemplating a relationship with a venture capital firm must be very
clear on what they are looking for, and what they are prepared to
sacrifice in order to benefit.
They must be serious
about professionalising their financial systems and controls, board
governance procedures and other facets of their operations.
They
must also know exactly by which criteria they will judge potential
investors, and select one whose vision and values are compatible with
theirs, people who fully assume that by the time they exit they will
leave the entity in a much better place than when they found it.
To
acquire a private equity investor is neither simple nor rapid. There
are many stages to go through, and many disciplines to understand, from
term sheets to investment agreements, from due diligence to board
charters, each with their acronyms and formats.
But if
you hit upon a classy one, do take the potential benefits very
seriously, as they have the capacity to take you to where you never
imagined you might reach.
mike.eldon@depotkenya.org.
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