|Considering Private Equity and Venture Capital?|
With banks tightening their lending and IPOs (initial public offerings) few and far between, established businesses are turning to private-equity lenders for expansion capital. What do those lenders look for to distinguish a great company from a good company? What are the qualities of a stellar management team? What do venture-capital firms look for these days?
ACCORDING TO DATABANK PRIVATE EQUITY LIMITED, THE FIVE "BUILDING BLOCKS" OF A GREAT INVESTMENT
Management: The most important piece that we consider when looking at an investment is the management team. In a great company, we find that at least some of the team is already in place, perhaps the CEO and one or two other key team members. We like to work with the company to add to and round out the team, rather than the myth of going in and replacing the CEO. The exception we sometimes may run into is a technology company whose founder wants to become the chief technology officer and requests help recruiting a CEO.
Product / Service: We like situations where the company's customers rate their offerings as superior in their sector. In the tech sector, we're looking for software, communications technology or services, semiconductors and electronics, and information services. Outside the tech sector, we consider everything from health care to life sciences, financial and business services, industrial and consumer products.
Market: We try to understand a company's demographics, economy and market share and how it fits with their plans for the future. It's nice to find a company with a sizeable portion of market share, but it can be a growing company serving a fragmented or underserved market that gives it plenty of room to expand. We're always looking down the line three to five years, trying to understand what will be happening then.
Historical and Projected Financial Performance: Since we deal with established companies, we look at their recent and projected future performance. The companies we fund tend to have annual revenues between ¢100 million and ¢1,000 million. The key metric, for us, is that the company be profitable or growing at a rate that will make it profitable in the near future. Companies that have good cash-flow characteristics show us that they have bootstrapped their way through to profitability.
The Deal: We always evaluate how large the investment opportunity is for us.
Sometimes, a firm does not have capital needs, but the founder is overexposed with equity in the company and needs to diversify his investment portfolio by selling some portion of the company. Other times, a founder is looking to sell the company outright. That's when we will buy 60% to 80% of the firm and let him continue to run the show and have a minority ownership interest that he can phase out over time if he chooses. Our involvement can also be a way for an early investor or ex-employee to get liquidity before the company goes public or is sold.
WHAT AN ENTREPRENEUR SHOULD LOOK FOR IN A VC:
Stability: Make sure that your VC firm has plans for an orderly transition for its senior members and a "next generation" poised to step in and take over. There are firms where the founders stay around for many years without a succession plan, and when they leave, the firm blows up. Don't be afraid to ask about the VC firm’s long-term plans. Luckily we at DAPEL are in out prime and poised to be around to grow with you for a few more decades!
Success Record: Look for investors who have some experience in and around your industry, but don't expect them to know your products or markets as well as you do. When you are an experienced, competent CEO, you know how to run your company. Rely on your investment partners to help in ways other than day-to-day operations.
Outreach: The key for entrepreneurs is to do some research so they understand what our investment firm's strategy is and how their company might relate to that strategy. It'll save you a lot of time if we are not a good match for your company. Cold calls and walk ins are welcome. Referrals are a great start since we may know and / or have worked with the person who referred you to us. It gives additional credibility.