Investing in a business earlier is a bit of a date. You weigh what’s exciting and what’s important to you with what doesn’t work for both parties. And if you leave, it doesn’t mean your date is wrong and you are right. It simply means that both parties are looking for a partner who meets different needs, and that combination doesn’t meet them.
Private equity firms are equally diverse. They try to invest with different criteria and capital levels, and prioritize different variables and categories for different reasons. Some won’t write a check for less than $ 100 million while others focus on aligning with their original investment thesis.
We pursue disruptive businesses based on a mission to find capital to increase scalability, along with spectacular sales and EBITDA growth. Our company seeks to deploy seed capital in the range of $ 12 million to $ 25 million, with an emphasis on the media, entertainment, healthcare and wellness sectors.
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Getting our attention, like most P / E companies, involves more than, “This is my big idea, this 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 finds. There’s a lot to learn about how we screen potential customers. These are some of the reasons we’re going to put aside the opportunity to invest:
We receive around 20 to 30 suggestions per month, many of which are unsolicited. They are between five and 70 pages long (the shorter ones are usually more robust and specific) and describe the elements of the business, revenue, management teams, EBITDA, and growth opportunities of the company.
Some proposals promise huge growth or “hockey stick” projections. You can cite markets or trends that can be reached in the category worldwide, even if those variables are not directly related to your business. Or, your projections are supported by undefined or undisciplined variables and vague circumstances.
An investment proposal is your first date and should be sharp and concise and reflect the values of the founders. We are looking for open, humble, cooperative and informed partners. If you’re asking what’s keeping you busy at night and the collection of answers is inaccurate or stored, we’ll move on pretty quickly.
Take money off the table
It’s not uncommon to meet a founder hoping to sell shares for part of their business and put some or all of the proceeds in their own pockets as a reward for their hard work. Our answer: good luck. This does not mean that they are not worth paying. For us, however, this is not a good use of our investor’s capital or a good direction for our association. In addition, this indicates that the founder may have different priorities for the company’s growth.
We want to put our money into working with management teams hungry for success and 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 need to be focused, aggressive, and aware of what we both want to do within an agreed timeframe.
The industry is too hot
Five years ago we invested in music publishing. Our thesis was that streaming music would work globally and encourage growth and value in a declining category. We participated and made significant investments. But others saw the same things as us. Ratings rose quickly and buyer value fell over time.
The music publishing business is still a good investment in the long run, but it’s very difficult for us to get a good return on our investment in five to seven years. The category will likely have a better value again, but we’ll stand on the sidelines until it does.
We have often told people that their deal is too early. They may have missed their core consumer offering, or their financial systems are inadequate, or their EBITDA may be too far from profitable. But this does not have to be a death sentence.
I encourage anyone who has been told no to take it away and treat the rejection professionally as you would any other disappointment. One company called back five years after we refused to invest, said it had done what we suggested earlier and asked for another look. We invested a few weeks after the call.
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We also saw the founders get angry and even slam the phone when they received disappointing news. We understand and feel drawn into your disappointment. However, this answer is not productive and will not help your future suggestions. We encourage you to listen and decide if you want to remove the proposed barriers that prevent you from obtaining the capital you need.
Check if the size is important
Careful handling of smaller investments is prudent for one reason: A $ 2 million deal requires the same or more work than a $ 20 million deal. We are in the business of investing capital and we must see the opportunity as a return on time and effort and a return on investment.
It should be worth doing a thorough due diligence process. Think of it this way: Nobody feels sorry for private equity if an investment goes astray. We are enthusiastic both professionally and seriously. Our due diligence is probably more demanding than that of a company receiving its first institutional capital.
We need to understand the customer base, margins and unit economics, systems, forecasts and potential bottlenecks and then review everything. Basically, the process becomes a full-time job for the CFO and much of the management team. The chance must be great enough not only to generate a return on the capital but also on the time invested.
In the advertising process, it is important to align our capital expectations with our time and due diligence obligations.
The spectacular legal battle
Any ongoing litigation is a red flag, especially conflicts that involve partners. It is better to reveal and go through everything from the beginning. Try to hide it and we will find it. We made late game deals based on such discoveries. If you are not sincere and transparent from the start, you are not the right partner for us.
Timing is everything
I love meeting the founders, hearing their passion, enthusiasm and, most importantly, their personal travels. Even if we don’t eventually invest, it is a pleasure to speak to someone who has built a business from scratch and really understands the mechanics, barriers, and opportunities in their business.
But what doesn’t work for us at this point can make a lot of sense for another P / E company or for us later on the company trip. In the dating world, timing is everything. The same applies to private equity investment associations.
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