Starting up is tough and it requires one key element to keep it going whether for operations or expansion: capital. So, a lot of founders would have raised money or are planning to raise money from a private equity investor to expand their business. Based on personal experience and after discussions with many other entrepreneurs, I am giving below a list of points to watch out for as you go through the process of selecting a Private Equity (PE) investor from a list of potential investors:
Remember that a PR investor is in the business of making money from money and, therefore his interest will be primarily in getting a substantial return in as short a period of time as possible.
You need his money and he needs your company to get a return on his money. Always remember that he is as interested in doing a deal as you are.
Build A Relationship With A Strong Investment Banking Firm
Find a good investment banker who will hold your hands through the PE selection and investment process. Investment bankers specialise in some industries and you can find them through your network of friends.
Talk to at least three shortlisted investment bankers before you take a decision. Once you have decided, let them go through your business plan with a tooth comb and ask them to critique it. The investment banker will then guide you on who to go to and what your valuation should be pitched at.
Find Out What The Private Equity Player Brings To The Table Other Than Money
It is very important for you to select a PE player who brings more than simply money to the table. PE players, like investment bankers, specialise in industries and you should expect them to get you introductions to other players in your business as well as in the circles that may influence your industry. Watch out for glib talkers who may promise the moon and deliver nothing.
Do Your Own Due Diligence
Just like a PE player will conduct due diligence on you and your business before he makes the investment, make sure that you also do your own diligence on the background of the PE player as well as the investments he has made.
If you can talk to one of their investee companies, you must do so to understand from a counterpart their experience with the PE player you are contemplating to give a piece of your business to.
Study The Term Sheet Very Carefully
You will be in a hurry to get the investment. Most promoters do not read the fine print of the term sheet. It is only later when the conditions of the term sheet start to be implemented does the promoter realise what he has signed up to. By then it is too late.
At the cost of delaying your investment, make sure you spend the time required to read through your agreements very carefully. Once the agreement has been signed, you cannot say that you did not realise what had been written!
Use A Trusted Lawyer
Detailed agreements are critical. The PE player will generally work with the big law firms.
You don’t have to – firstly, these big firms will be expensive and secondly, they may have a conflict of interest with you. Use a lawyer you trust who can guide you through the maze of the legalese in all the agreements. Understand how multiple agreements are linked together as well as all the terms you are signing up to including guaranteed IRR’s, tag along, drag along, QIPO, Liquidity Preference, and similar such conditions.
Don’t Get Pushed Into Growing Your Business At The Rate Your Investor Wants
Finally, make sure that you grow your business at a rate that you can manage without putting stress on the business or your management team. If your PE player pushes you to grow faster than you believe you can, it is better to push him back earlier than to get caught in a difficult business situation. Watch out for “spreadsheet” specialists who will pound away on their computers to deliver mythical valuations for themselves and you!
So there you have it, the cheat sheet to selecting your PE investor, your partner-in-crime. All the best!
[Ashutosh is the founder Chairman of Guardian Pharmacies and the author of the best-selling books, Reboot. Reinvent. Rewire: Managing Retirement in the 21st Century; The Corner Office; An Eye for an Eye and The Buck Stops Here – Learnings of a #Startup Entrepreneur.]