Ideas & Debate

What it takes to bag venture capital funds

To acquire a private equity investor is neither simple nor rapid. FILE PHOTO | NMG
To acquire a private equity investor is neither simple nor rapid. FILE PHOTO | NMG 

More organisations, including family businesses, are reaching a point where their further growth is restricted by the availability of capital.

The owners are as ambitious as ever, and the potential in the market for what they are offering continues to be high.

Yes, they can seek loans from banks, but some are now turning to venture capital funds for support.

My recent experiences with the world of private equity have led me to share the learning from reaching out to such funds. Those who have done so typically expect to continue growing at a significant pace, and they appreciate, however reluctantly, that they can no longer rely on their own resources and expertise to enable this to happen.

They wrestle with the prospect of importing talent that complements theirs — including other shareholders and hence other directors. What? Dilute their absolute control over the enterprise? Even cede it? Unthinkable? For many, the majority even, it is. But for the truly brave, who consider taking the plunge, they know it is a price they have to pay.

So they identify likely investors, hearing from them about the onerous conditions they will impose if they are to inject the funds for expansion.

Make no mistake, these private equity folk are curious, very curious. They want to know everything about what you do.

About the numbers of course, but also about your customers, your staff, your systems, and perhaps most importantly about your values and your culture.

To put it bluntly; they want to know if you can be trusted. Are you telling them the truth — including the delicate and the inconvenient? Is your operation transparent and accountable, paying the taxes due, treating staff and customers fairly?

Are you responsible, reliable characters who will form worthy partners without leading yourself or the investor down?
If you will find it hard to tell a good story, an authentic one, don’t bother approaching a venture capitalist.

But what about those behind the investment funds themselves? What are their values?

Do they conform to the stereotype of such outfits, that they are only in it to squeeze the assets, to shrink the costs and force up the revenues, so that a few years down the line they can exit with a tidy profit?

Or are they there as partners, to add value, to build the business so that it does good in addition to doing well? Will they help you strengthen your structures and systems? Will they introduce you to new products and markets? Will they brainstorm on strategies, show you better ways to manage performance? And be clear on why you approached them and not a bank in the first place.

There must be a serious benefit from accepting that their funds will dilute your ownership, at least for the years when they will be a major if not majority shareholder.

Vision and values

Or did you imagine they would just pour in cash and let you continue with business as usual?

Those contemplating a relationship with a venture capital firm must be very clear on what they are looking for, and what they are prepared to sacrifice in order to benefit.

They must be serious about professionalising their financial systems and controls, board governance procedures and other facets of their operations.

They must also know exactly by which criteria they will judge potential investors, and select one whose vision and values are compatible with theirs, people who fully assume that by the time they exit they will leave the entity in a much better place than when they found it.

To acquire a private equity investor is neither simple nor rapid. There are many stages to go through, and many disciplines to understand, from term sheets to investment agreements, from due diligence to board charters, each with their acronyms and formats.

But if you hit upon a classy one, do take the potential benefits very seriously, as they have the capacity to take you to where you never imagined you might reach.