Private Equity investors are highly selective of the companies in which they invest. The focus of a PE firm is on a 5–7 year exit that will yield returns. Private Equity is an active investor who will take a majority stakeholder position in the business to accelerate growth in order to optimize their ROI. PE investors are likely to take an active role in restructuring the company from a process and finance perspective. Don’t mistake this level of interaction and involvement for a desire to gut your company; Private Equity will look closely at the existing teams to ensure that the implementation of their recommendations will go smoothly. A good PE investor will want strong leadership, reliable middle management, low employee turnover, and a motivated workforce to ensure that their vision for the company will be executed.
I am fond of quoting that about 70% of my investment decision of an early-stage company is the team. My rationale is simple: everything goes wrong and only great teams can respond to competitors, markets, funding environments, staff departures, PR disasters, and the like.— Mark Suster, Upfront Ventures
Let’s review some of the most important factors considered by PE firms as they weigh the investment in your firm.
1. Stable, Recurring Cash Flow
A PE firm keeps an eye on operating costs, overhead, and the cost of doing business as it applies to human capital, as well as those costs for upgrades of processes, software, or office space. In order to manage all of those costs, PE firms look for recurring revenue models. With a stable cashflow, they can be sure that there will be revenue to support current business operations while their investment ramps up future growth.
2. A Competitive Advantage
Be unique and visionary within the industry. If you’re looking for someone to invest money in your blue sky vision for the future, you’d better be sure that what you do is unique and unrivaled in your industry. Asking the question, “What are we the best in the world at?” can bring to the forefront how your company provides a unique product, excels at service or is revolutionizing a sector that is underserved. Articulate this clearly and well and you’ll have your choice of funding opportunities.
3. A Track Record
Private Equity Firms invest in stable companies that need a single injection of capital to accelerate their growth into a new or newly vulnerable area of the market. A Private Equity company will look at how your model has proven itself out over time, your revenue, your margins, how you have improved operationally, and how all of those factors may contribute to this next phase of growth. A track record doesn’t mean you have to be the same year-over-year, it does, however, it means that when you show losses or declines in revenue and decreased margins, it is followed by course correction and marked improvement.
4. Strong Leadership and Management
While most PE investors will take an active role in optimizing existing processes, they are not looking to raise the current structures and start from scratch. PE’s will look for evidence that ownership has invested in strong leaders and that management is performing at a high level. Articulating the internal structures that drive growth, innovation, and productivity in your company will help a PE firm know that their ideas will have an engine to bring them to fruition.
5. Room in the Market
As PE investors examine the companies seeking funding, they also look at the market trends to determine whether there is room to take on more of the market share or whether there is a coming disruption in the industry of the company in which they are interested in investing.
Businesses that are seeking PE investment are high-growth, mature companies with a clear vision for their future. Bringing in Private Equity money is the start of a new and exciting stage in your company’s lifecycle. With the right Private Equity partnership, the vision you have for your company’s future comes within reach. Experienced PE firms know how to bring the right amount of change to an organization to ignite the kind of exponential growth that will take you to the next level.