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The opinions expressed by the entrepreneur's contributors are their own.
Investing in previous businesses is a bit like dating. You weigh what's exciting and what's important to you, and what's not working for both parties. And walking away doesn't mean your date is wrong and you are right. It simply means that both sides are looking for a partner to meet different needs, and this match doesn't meet them.
Private equity firms are just as diverse. They try to invest on different criteria and levels of capital, and they prioritize different variables and categories for a number of reasons. Some won't write a check less than $ 100 million while others focus on aligning with their original investment thesis.
Related: A Beginners Guide to Private Equity
For us, we're looking for disruptive, mission-based companies looking for capital to increase scalability, as well as dramatic sales and EBITDA growth. Our company intends to deploy seed capital in the range of $ 12 million to $ 25 million, with an emphasis on the media, entertainment, healthcare and wellness businesses.
Getting our attention, like most P / E companies, means more than, "Here is my great idea, here is my three-year forecast of investing in me." Given the stage we are investing in, we are usually the first institutional investor a company will encounter. There's a lot to learn about how we screen prospects. Here are some reasons why we are saying goodbye to the opportunity to invest:
We get around 20 to 30 suggestions per month, many of them unsolicited. They are five to 70 pages long (shorter ones are often stronger and more specific) and describe the elements of the business, revenue, management teams, EBITDA, and growth opportunities for the company.
Some proposals promise huge growth or "hockey stick" projections. You could cite globally addressable markets or trends in the category – even if those variables are not directly related to your business. Or their predictions are based on undefined or undisciplined variables and vague circumstances.
An investment proposal is your first date and must reflect sharply, closely, and in-depth the values of the founders. We are looking for partners who are open, humble, cooperative and informed. If you're asking what's keeping her busy at night, and the collection of the answers is canned or vague, we'll be moving forward pretty quickly.
Take money off the table
It is not uncommon to come across a founder hoping to sell equity for part of their business and pocket some or all of the proceeds as a reward for their hard work. Our answer: good luck. This is not to mean that they don't deserve the payout. For us, however, this is neither a good use for our investor's capital nor a good direction for our partnership. In addition, this indicates that the founder may have different priorities for the company's growth.
We want to use our money to work with management teams hungry for success and to agree on a successful exit. We want to make sure the investment goes into the business and then bet together that the capital will accelerate the company's growth and profitability significantly. If the founders are to stay they have to be focused, aggressive, and in step with what we both hope for within an agreed timeframe.
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The industry is too hot
Five years ago we invested in music publishing. Our thesis was that music streaming would be successful worldwide, promoting growth and value in a declining category. We jumped in and made significant investments. But others saw the same things as us. Valuations rose quickly and the value as a buyer decreased over time.
The music publishing business is still a good long term investment, but it is very difficult for us to get a good return on our 5 to 7 year investment. The category will likely return to better value, but we will be on the verge of investing until then.
It is premature
We have often told people that their business is just too early. They may not have fully figured out if their core consumer or financial systems offering isn't appropriate, or their EBITDA is just too far from profitable. But it doesn't have to be a fatal blow.
I encourage anyone who has been told no to shrug it off and treat rejection professionally as they would any other disappointment. A company called again five years later after we refused to invest. It said it did what we suggested earlier and asked for another look. We invested within weeks of the call.
We've also seen founders angry – even opening the phone when they received disappointing news. We understand and feel our way into their disappointment. However, this answer is not productive and will not help your future suggestions. Our advice is to listen and decide whether to address the proposed barriers that are preventing them from obtaining the capital they need.
Check if the size is important
Careful handling of smaller investments is prudent for one reason: A deal for $ 2 million requires the same or more work than a deal for $ 20 million. We are in the business of turning capital into action and we need to consider opportunity as return on time and effort in addition to return on investment.
It must be worth our time to conduct a thorough due diligence process. Think of it this way: Nobody feels sorry for private equity if an investment goes astray. We are professionally and seriously on the hook. Our due diligence is probably more demanding than that of a company receiving its first institutional capital.
Related topics: How to decide whether you need debt or equity financing for your business
We need to understand the customer base, margins and unit economics, systems, projections and potential pitfalls and then review everything. The process essentially becomes a full-time job for the CFO and much of the management team. The opportunity must be large enough to generate a return not only on the capital but also on the time investment.
During the application process, it is important to align our capital expectations with both our due diligence and due diligence.
The show stopper for litigation
Every ongoing legal dispute is a red flag, especially conflict between partners. It is best to disclose everything from the beginning and take us through the book. Try to hide it and we will find it. We made deals late in the game based on such discoveries. If you are not open and transparent from the start, you are not the right partner for us.
Timing is everything
I love meeting founders, hearing their passion, enthusiasm and, most importantly, their personal travels. Even if we ultimately don't invest, it is a pleasure to speak to someone who has built a business from the ground up and really understands the mechanics, barriers, and opportunities in their business.
But what doesn't work for us right now may make sense for another P / E company – or for us – later on on the company's journey. In the dating world, timing is everything. The same applies to private equity investment partnerships.