Venture capital and private equity have a reputation many entrepreneurs shy away from. Cleaning up with the myths at Real Business Funding are Rob Donaldson, Baker Tilly; Greg Marsh, onefinestay; David Sanger, Rollover & Scent Air; Ben Walmsley, Spring Law; and Mark Wignall, Mobeus Equity Partners, in a discussion with James Harris, deputy editor of Real Deals.
This discussion is treating the question what venture capitalists and private equity investors really look for in portfolio companies, but also what their backing really entails. Afraid to lose control over your company? This is where you’ll find out what to expect.
Entrepreneurs and investors are sharing and analysing the common criticisms of private equity and venture capital investor; will we hear some war stories? In the end, a successful funding relationship is based on aligning the interests between investors and entrepreneurs.
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Mark Wignall on what he looks for when investing in a business: “We specialise in management buyout deals. A lot of venture capital and private equity deals are about growth and expansion. You need to see a credible business plan that evidences that this growth can be achieved, and high returns are available at acceptable risk. You have to evidence why that growth plan is special, because VC and PE in the UK is highly specialised. Demonstrate competitive advantage; show that you will not just get wiped out by larger companies doing the same thing. We look at what I like to describe as ‘human’, rather than financial things. Such as fidelity, honesty, integrity.”
Greg Marsh has been on both sides; venture capital and entrepreneurialism. He says, “[venture capitalism] is a bit of a deal with the devil as a business owner. VC is not right for anything except a relatively small proportion of businesses. When you take that capital, you give away control; they will have approval rights over your business plan, lots of influence over your business, and they want you to grow very fast, or fail quickly and go home and stop wasting their time and money.”
David Wignall: “My motivation [to use venture capital] was to maximise my exit, and it’s been a very interesting roller-coaster with the deal. They borrowed £6m from HSBC to fund part of the acquisition. The business hit some turbulent times a few years ago and the banks were very punitive in the fees they levied, but I was largely out of the businesses and watching as a non-exec board director.
“If you do the right deal for the business with the right VC they can bring a huge amount to the party. Presumably they’re in that sector and are experienced business people.”
Ben Walmsley says that the key to the right funding is that you know who your devil is. “You need to understand what the requirements of the source of funding are. If you communicate with ‘your devil’ and they know what’s going on in your business, you will have a better relationship. A good investor will have an understanding of your business.”
Rob Donaldson stresses the importance of getting involved with a good advisor when you’re thinking about raising private equity or venture capital. “I should say the job of advisers is to look at a business, help assess it, look at different sources of funding, and try to assess what is the right path for a company to take.
“Private equity people want high returns, and can be difficult to deal with, but they are a very active source of investment.” Don’t just choose any investor who is offering a decent deal; you will have to live with them for years, so it’s just as much about the person. “If you want to take a lot of money off the table, they are a very realistic route to take. But you have to go in with your eyes wide open. Find someone you like, you want to deal with, not just whoever gives you the best offer.”
Greg Marsh says this source of investment certainly isn’t for everyone; for some, however, it will be only right way. “Most people want to start a business to make money, and to have autonomy and control. If what you really want is to make as much money as possible, taking private equity and venture capital money is the way to go. But you do have to sacrifice some elements of control. If the reason you want to run your own business is because it’s a lifestyle, and you want to keep it over decades, it’s almost always the wrong decision. But for a certain kind of business and a certain kind of entrepreneur, it’s not only a great solution – it’s the only way.”
People who have been part of these PE and VC deals are always happy to give you a few minutes of their time, Marsh explains. “So if you are seriously considering this path, do your homework and talk to someone.”
Rob Donaldson adds, on the importance of advice and support: “Entrepreneurs going through these processes often just don’t know what they’re in for. It should be a thorough process; but if you prepare properly, and you have someone on side who can take you through it – that’s what lawyers and accountants are for – you can get through on the best possible terms.”
David Sanger: “It’s 100 per cent essential that you have an advisor. If not, you won’t get the best deal of someone who knows the roads, and secondly, if your’e selling a business, they’re a price worth paying if they’re going to get you some 20 per cent more money.”
It is agreed across the panel that entrepreneurs have to do their homework; advice is vital, and it will probably not come from the investor directly. Mark Wignall: “If anyone of you tries to cold call me, you’ll probably find that I’m out; if Rob Donaldson tries to call me, I’m probably in. Every time that my business mobilises on a deal we research the company, we research the market, and when we start talking to the advisors, we straight away say, ‘here we are, here’s a list of every single company that we’ve ever backed, and their contact details – talk to them.”
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