By Edward D. Hess,
Distinguished Executive in Residence and
Adjunct Professor of Management, Goizueta Graduate School of Business
I spent 20 years of my career on the private equity side of the investment world – as an agent and as a principal. I participated in billions of dollars of private equity investments. Accessing private equity is part science and part art. By science, I mean raising private equity is a process that can be managed like any other business process. And by art, I mean the feel of a deal – the emotional components of the chemistry, why people do a deal with each other – the motivations, the needs, the touchy-feely stuff. Raising private equity is simply making and closing a sale.
In summary form, here are my ten keys to successfully raising private equity growth capital:
1) “Scrub The Patient”
Hire an independent, objective, experienced advisor whose first job is to critique your company and find all the “obstacles to sale” – problems that can come up in due diligence – and deal with the problems up front. Common problems are poor HR compliance, lack of audited financials, tax issues, incomplete legal formation documentation, inadequate financial personnel, unresolved lawsuits, IP issues, uncollectable receivables, etc. Every company has issues. I have never worked on a deal where the actual income was what the owner said it was. FIX THE PROBLEMS BEFORE GOING TO MARKET.
2) Target The Right Money
Private equity investors can be categorized along three (3) parameters: (A) industries in which they will invest; (B) preferred dollar size of the investment; and (C) geographical preference. Find people for whom you meet all three qualification criteria. Then choose advisors (financial, legal, and accounting) who are high quality institutional firms who have done deals with the people you have targeted. Choose the right advisors who can “nominate” you to join the private equity club. The right advisors legitimize you because it is assumed that they would not take you on as a client unless you were good.
3) Where’s The Beef?
Investors are looking for growth stories and the management team that can execute – pure and simple. Why is your opportunity compelling? Why can you execute? Prepare a 1 ½ page Executive Summary and a 10 page Offering Memorandum. Remember the C’s – be Concise, be Clear, and be Compelling. Avoid the D’s – denial and defensiveness.
4) Create a Competition
Just like in high school, everyone likes to take the pretty girl or handsome boy to the dance. Create a competition. What do I mean by a competition? Have more than one firm bidding on your deal and keep the bidding alive until you have negotiated all the major financial, operational, control, and exit issues. Only through a competition will you get a market deal; only through a competition can you keep investors’ pricing and valuations “honest.” The key to a competition is getting the first major player to the table to talk and then using that player as legitimization – as “bait” – as an attractor – to bring in other players. Investors do care and do take notice of who their competition is.
5) Keep The Leverage
He who has the gold makes the rules. And you do not have the gold. Your only recourse to keep the game from becoming even more tilted to the money’s advantage is by keeping your competition going as long as possible. Get bids and rebids and negotiate major deal points BEFORE signing an exclusive or a letter of intent. Once you sign an exclusive or a letter of intent, you have lost whatever leverage you had because you will lose the other interested parties and they will focus on other deals. And psychologically, does anyone like being someone’s second choice?
6) “Money is fungible.”
Money is fungible. What else can your new investor bring to the table? Suppliers? Customers? Relationships? What doors can they open? What companies have they invested in which can become customers or joint venture partners? And remember the key test: Would you invite the money partner over to dinner? Do you like the people? Everyone is nice and a good partner when everything goes well – check them out. What are they like when things go bad? Let me stress this point – It is easy to be nice and honest when things are gong well. But business does not always go well. You will not do as well as you think. How is the money partner when the going get tough? How have they reacted in the past? Find out!
7) Start Early
In the best of times – absent luck or an unusual circumstance – closing a money deal takes 6 – 9 months from start to finish. So start early and avoid the vacation times of August and December 15th – January 15th. Do not be in a position of an investor finding out on due diligence that you are running out of cash. Remember the ole country saying of “Banks like to loan money to people who don’t need it.”
8) Avoid The Deal Killers
So once you have chosen a partner and have negotiated a fair deal, what can kill your deal? Surprises, lies, trying to retrade the deal, and “bad” attorneys. Who are the “bad” attorneys? Attorneys who see it as their mission to prove they are smarter than either you or the other side’s attorneys and who try to impress you with how smart they are. Closing a deal is a difficult enough emotional experience without ego playing a big role. Every deal will “die” an unexpected death two or three times. Hire a good, experienced attorney who is a deal closer and who can advise you of the risks, quantify those risks, and allow you to make informed business judgments.
9) Find Someone Who Needs to Do a Deal
Ultimately, you need to find someone who for some reason personal to them needs to do a deal. Investors need to do deals for different reasons – figure out their motivations. But do not get cocky. I have seen investors walk at the closing table because of changes external to the deal – industry developments, macroeconomics, and their needs have changed. A deal is never, never done until the check clears.
10) Don’t Forget The Business
Raising equity is a time consuming effort and it requires you to focus on things other than the business. Who will cover for you in running the business? How can you minimize the loss of momentum, focus, accountability? Plan and prepare to spend half of your time on fund raising efforts for six months. How will you do it?
Raising private equity successfully and efficiently is both a process management task and a sale – you are selling yourself, your enthusiasm, credibility, and ability to execute. Are you a good “horse” to bet on? If the answer is yes, pick the right team of advisors and go for it.