Pros and Cons for a Growth Company to Take PE Capital
Jan 29, 2024
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Jason Mironov, Managing Director at TA Associates, discusses pros and cons of taking PE capital. Topics include lack of operating experience, board control, dilution for founders, building wealth, handling inbound contacts, and working with the founder.
Partnering with private equity firms can help growth companies de-risk investments and accelerate growth.
Private equity firms bring valuable resources and expertise to the table, enhancing decision-making and providing insights for founders and management teams.
Private equity investment offers opportunities for wealth creation while minimizing dilution, allowing founders to retain ownership and maximize value preservation.
Building strong relationships and partnerships is essential for success in business, involving understanding needs, leveraging referrals, and demonstrating commitment.
Deep dives
Benefits of Taking Private Equity Capital
Taking money from private equity firms can provide several benefits for growth companies. One major advantage is the opportunity to de-risk individual investments. Entrepreneurs who own 100% of their business may hesitate to take on significant risk that could accelerate growth, as it directly impacts their net worth. Partnering with a private equity firm can help diversify their investments, allowing for more risk-taking and growth opportunities. Additionally, private equity firms bring valuable resources and expertise to the table, contributing to diversity of thought and experience in the boardroom. This can enhance decision-making and provide valuable insights for founders and management teams. By leveraging the network and past experiences of private equity partners, executives can draw on a wealth of knowledge, lessons learned, and connections to drive success in their own business. The partnership between private equity firms and growth companies fosters collaboration, aligning incentives to pursue long-term success together.
Control and Cultural Shift
One potential concern for founders considering private equity investment is the perceived loss of control. However, in practice, private equity firms often prioritize collaboration and partnership rather than imposing strict control. While the majority shareholder does have the final say in decision-making, successful partnerships are built on mutual trust and cooperation. Private equity firms value the knowledge and expertise of founders and management teams, aiming to align interests and work together towards common goals. The culture shift towards an IRR-focused mindset does not necessarily mean sacrificing customer or employee-centric values. Private equity firms recognize the importance of maintaining a strong company culture and provide support for continued growth and employee satisfaction. Ultimately, finding the right private equity partner who values collaboration and respects the founding team's vision and values is key to ensuring a successful and harmonious partnership.
Wealth Creation and Dilution
Private equity investment, particularly through secondary capital, offers opportunities for wealth creation while minimizing dilution. When a growth company is already profitable and does not require additional capital, private equity firms can purchase shares directly from individual shareholders, providing liquidity to founders and early investors. This allows founders to retain significant ownership and value in their company, with the potential for substantial wealth creation during future liquidity events, such as an IPO or sale to a strategic buyer. By waiting until the business is at a scale where it is profitable and has demonstrated growth potential, founders can maximize their returns and preserve wealth. Partnering with a private equity firm like TA Associates, which focuses on investing in profitable and growing businesses, can help founders navigate the complexities of timing and maximize value preservation.
Building Relationships and Timing
Building strong relationships is a distinguishing factor at TA Associates. The firm takes an individual, bespoke approach, dedicating time and resources to getting to know potential portfolio companies and founders. TA Associates focuses on relationship building and providing value to founders, recognizing that establishing trust and rapport is crucial for a successful partnership. Timing is also an important consideration for founders when considering private equity investment. Waiting until a business is profitable and has reached a certain scale before seeking outside capital can result in more favorable terms and preservation of ownership. Founders can proactively engage with private equity firms when they believe it is the right time for their company, leveraging the relationships they have built and exploring potential partnerships that align with their goals and vision.
Navigating Relationships and Partnerships
Building strong relationships and partnerships is essential for success in business. This involves understanding the needs and goals of junior associates and talking to other founders for referrals and advice. It's important to nurture relationships with potential investors and consider referrals and advice to explore capital strategy and growth opportunities.
The Value of Becoming a Customer
When seeking investment, it is beneficial to prioritize becoming a customer of the potential investor. By using the product or service and demonstrating a genuine interest and understanding of its value, it shows commitment and builds credibility. Alternatively, preparing an investment thesis that highlights the reasons for investing can also prove the seriousness and level of care towards the partnership.
The Importance of Alignment and Partnership
Cultivating a meaningful and productive partnership involves aligning incentives and creating value. This can be achieved by providing strategic resources, such as expertise, connections, and market insights, to assist with revenue generation, M&A opportunities, growth strategies, and geographic expansion. Effective partnerships also involve open communication, transparency, and a shared focus on success, creating opportunities for personal and professional growth for all parties involved.
Partnering with PE firms is a great way to exponentially grow a business and reach new heights. However, there are considerations that must be taken into account, before taking PE capital. Fully understanding them will increase chances of success, in the attempt to unlock the full potential of the business.
In this episode of the M&A Science podcast, Jason Mironov, Managing Director at TA Associates, discusses the pros and cons of taking PE capital.
Episode Bookmarks
00:00 Intro
05:29 The Lack of Operating Experience
07:03 Pros of taking money from a private equity firm
11:01 Other factors to take money from PE firms
12:49 Cons of taking money from private equity
17:16 Focusing on IRR
22:10 Culture of focusing on numbers
26:54 Working with Unhappy CEO
30:06 Board control
35:33 Expectation for the Board Structure
38:30 Dilution for founders
42:53 How to build and preserve wealth
47:20 Approach on partnership
51:03 Handling Inbound Contacts
56:51 Creating value before partnership starts
01:03:15 Working with the founder
01:05:38 Pushing M&A to portcos
01:08:51 Founder Exit
01:16:01 Timeline of investment
01:20:26 Craziest thing in M&A
This episode is sponsored by DealRoom. Ready to take your M&A to the next level with software made to manage each stage of the deal process? See how DealRoom can facilitate your next deal at www.dealroom.net.
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