VCs, PE and the Cash Infusion Question

I take a lot of meetings.

Some of them, of course, are with my clients.  Others are for business development.

And then there are those meetings that look like being for one purpose and end up for another altogether.

I had one of those last week.  It was with a management consultant who works with Private Equity (PE) firms.

Being a Silicon Valley sort of person, I'm far more oriented toward the Venture Capital world.  That's for a lot of reasons:

  • First, of course, it's because it's the venture guys who have made the Valley possible all these years.  They deserve a world of credit for that.
  • Second, it's because I like their purpose.  They see something out there - in most cases something that doesn't yet quite exist but shows all the potential in the world - and they invest in it.  They invest in the future not only of start-ups but also of companies that need help in later stages to scale and fulfill their potential.
  • The third reason is because, if you know anything at all about how VCs work, they invest as much in the people who bring them the opportunity as they do the opportunity itself.  You do a pitch to a VC and, as well as having a viable, preferably already revenue-generating, product or service and you'd better also have a really strong management team.  If you don't, they'll find someone else with a similar product but better chances of bringing the business to fruition.

And that's why, for a lot of reasons, taking the meeting with a person who lives in the PE world was, I knew, going to be a fascination - no matter the outcome.

She's seriously smart.  Talented, too.  She knows how to create success for her clients - and that's a good thing.

But the clients are the PE firms - not the companies they have bought.  Which makes all the difference in the world.

In her world, EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) isn't just a key indicator - it's practically the only indicator.  And in the PE world, that makes sense.  Because the value of the company they bought is wholly dependent upon how much they can get for it when they sell it - preferably the sooner the better.

Because their goal is to sell.  So the companies need the highest levels of earnings possible.  And the faster the sale, the better.  (I know.  I'm repeating myself.  But if there's one thing you need to understand, it's that one fact.)

The whole issue of speed and investment and commitment was very much on view in Tamara Mellon's recent FT interview about the sale of her company, Jimmy Choo (of the eponymous and beautiful shoes and accessories) out of its third PE relationship to a "long term partner," Labelux.

She even went so far as to say that PE isn't a good fit with luxury because PE doesn't understand a long-term relationship.  PE isn't willing to invest the up-to-30 years that it may take to adequately build the brand.

She's right.  Because that's not the PE model.

To be fair, neither is it the model for VCs.  They want - and need - a faster turnaround.  But the thing you very often see is that the VCs involved in taking a company to success stay with that company for years to come.  On the Board and as major shareholders.

I'm not romanticizing these guys.  I promise.  But, in the world of business building, it's the VC model that wins.

Which brings us to you.

As you build your company - no matter where you are in your developmental arc - there will be times that you need a cash infusion.  It can come in the form of a straightforward loan.  Or, if you're in start-up, a VC or Angel Fund may your answer.  Or, if it makes sense and you're at that point, you may be looking at an IPO.  Or, particularly if you're further along in your development, you may want to see what the PE community has to offer.

When you do, the questions you have to ask yourself are:

  • What is my purpose in getting this money?
  • What is my commitment to this organization?
  • What am I looking for in my financial provider?  (Don't ever call them partners.  They're not.)
  • What kind of commitment do I want from them?
  • What value - beyond their money - do they bring to helping my organization succeed?
  • What are the best and worst case exit scenarios I can imagine - and which of those providers plays into each scenario?
The more you are focused on the long-term, the easier it will be to determine how best to strategize your organization's financial needs from outside sources.

Start now - whether you need the bucks or not.  Because it's always good to have a plan in place.

Especially when it comes to money.


Tamara Mellon makes new love match, predicts luxury/private equity divorce (FT)