Sep 11, 2013

Private Equity - Tips When Raising Growth Capital for Your Business

Private equity isn't for every business - unless you have a compelling business model, recurring cash flow of at least $1 million and a clear strategic plan for growth - it's probably not a fit.

However, if your business does meet this criteria and you're looking for cash and a partner to help scale your business to the next level then private equity might be the answer.

Read: Tips When Raising Private Equity

What is the goal? Growth capital, liquidity event, IPO, recapitalization, acquisitions? How big is the raise? The total amount needed until goal is met - $5mm? $25mm? $100mm?

The goal and size will determine which firms are a fit. You want to get the best deal possible but more importantly you need to have aligned interests. Negotiating favorable terms can still end in a bad deal if strategic and financial goals are not aligned. Return expectations and timeframes are usually the most important considerations.

How Much to Ask For
Raise twice as much as you need and double your timeframe. Don’t ever say, “After we get $10 million from this round we’ll raise another round of $20 million.” Investors hate the idea of dilution and delayed returns.

Strategic Plan
You should know where you will spend every penny of the investment you take on. Your Strategic Plan should align with your Financial Plan. A Strategic Plan is a 5-7 year roadmap for your business. It's how you're going to reach your end goal. The Financial Plan is simply a 5-7 year projection that matches your plan. Explaining it is easy. Creating a thoughtful plan and then executing on the plan is hard. That's why you get the big bucks.

Hiring a broker is a thought worth considering. They will charge a 2-10% fee based on the amount you're raising (varies by firm and deal size). They can help open doors, schedule meetings and scrub your pitch deck and assist during the due diligence and documentation phase. I never personally saw the value but it's worth mentioning.

Trusted Advisor
If you've never raised capital before it's critical to have someone on your side who has. This can be a friend, board member, attorney or advisor but you don't want to go into the process blind. Even if you have a broker you need a trusted advisor who has already raised private equity and been successful as well.

Market Outreach
When seeking capital be proactive instead of reactive. Inbound interest is a great signal of success but that is a limited market.You are in the driver’s seat. You have all the leverage and despite any BS you hear they will be lucky to invest in your company. Quality deal flow and opportunities are rare.

Search private equity firms by location, investment size, industry, etc.

Value Added Services
Money is a commodity and there are a thousand PE firms. But which ones add value? What doors can they open? What is the sweat equity commitment to your business? You don’t want investors in suits and ties – you want operators who will roll up their sleeves and help sell, grow, grind, build, hire, manage, operate, market, etc.

Your Designated Partner
Who is your partner at the firm? Could be a great firm with a bad partner or bad firm with great partner. Something to consider. Do you like the people? Would you hang out with them outside of your professional relationship? Where are they from? What are their values? Do they have families? If the deal goes sideways is this partner going to fight for you and the business?

Very critical to get this right. Less is more. Sell the vision, market, SCA, team and high level financials. Leave the mundane details to follow up conversations and due diligence. The presentation is meant to get their attention and gauge their initial interest.

Watch out for liquidation preferences, return multiples, warrants and other fancy terms they claim are “standard.” Every stakeholder involved should be able to clearly understand the deal and key terms. This is a partnership, not a game of “gotcha.” A lot of these private equity guys are JD's and like to over engineer deals. Keep it as simple and clear as possible.

Their Due Diligence
Financial statements must be precise and reviewed or audited. And financial reporting, KPI’s and other systems are just as important. Make sure to tighten up the organization all the way down to the HR Manual because every detail matters. They will think, “How can this team grow and win if they can’t get it right at this stage?”

Your Due Diligence
Do your own due diligence. Talk to their LP's from current and former funds. More importantly talk to their portfolio companies current and past. Get the real scoop.

Every deal is different but from the day you start reaching out you can expect about 3 months to get meetings and another 3 months of follow up and due diligence. Negotiating terms is usually another 3 months so to be safe add on another 3 months and give yourself a full year from start to when the check clears in your account.

Plan B
Always have Plan B - Assume nobody gives you a penny. Have a plan in place that gets you to your goals by bootstrapping without outside capital. Like in poker - don't bluff unless you have a winning hand. You want to raise the money to accelerate growth or take advantage of an opportunity. You never NEED anything.

Running a business is not easy. Raising money is not easy. Running a business AND raising money will be one of the hardest things you'll ever do.

Keep in mind that the people that invest in your company are more important than the terms. Good people will provide fair terms but they will also be a great resource and partner as you grow your business. You will be in the trenches with this group for better or worse, so be careful who you chose.

Private equity capital is not for every company but if you have a great business, plan and partner it can take you to another level of success.