At some point in a company’s life cycle, outside investments may need to be considered to fund growth that regular bank debt financing can’t support and/or provide liquidity to original investors and owners. When that time comes, chances are you will have to make a “pitch” to a private equity firm.
Most people have heard the term “private equity”. It’s also referred to as PE by people in the know (why do people start throwing around acronyms when describing things… insecurity perhaps?). It is a fancy word for a bunch of rich people who pool their money and hire a group of people to make investments in different companies with that pooled money. These would be the people Bernie Sanders hates (if elected, they will feel the “Bern”).
Of course, describing PE in that manner would be too simple and not intimidating enough to keep the average citizen confused. Phrases like, “Fund #1”, “cash on cash investment”, “non-strategic investor” and “multiple of EBITDA” are used to make it seem more mysterious than it is.
I have dealt with PE (see how smart I am) firms for over 20 years. I have probably made somewhere in the area of 100 presentations to PE firms. Sometimes it was for an investment in a company and sometimes it was a sale of the entire company. I was successful in a few of those occasions, but more often than not the PE firm is not interested in the deal you are proposing for a variety of reasons. No matter what the decision, the process of the “pitch” can be a very humbling and potentially humiliating experience. If you have ever watched Shark Tank on ABC, it’s sort of a made-for-TV (literally) version of the process. Getting a yes or no from these firms, however, takes a lot longer than 15 minutes. But, hey it’s TV… do you think the Kardashians are real life?
When people have a business idea and run it by friends or family they usually get supportive comments and encouragement to pursue the idea. Although nice, those comments are worthless in evaluating how good the idea actually is. If you are asking people to invest in your company, or for that matter, buy your company, you are asking them for money in return for value. People who work at PE firms are experts at determining value, evaluating risk and negotiating the best deal for their investors.
Let’s talk about their investors… they are mostly all rich. I don’t mean rich like, “my neighbor is worth a million dollars” rich. I mean, “they have to decide which airplane to fly to Aspen because the runway is short”, rich. Some of these rich people are smart and some are not. But, here is one thing they all are: really, really good at picking smart people to manage their money. They all have investment return expectations that would make your local loan shark blush. Obtaining those returns is the responsibility of the people who work in the PE firm. They are charged with finding businesses to invest in that will provide those returns. They are dedicated to making rich people…well, richer.
Knowing that’s the goal of the PE firm, you had better be prepared to explain your business proposition down to the smallest detail. You need to be able to explain the complexities of your business in concise easy-to-understand terms, but also be prepared to answer any questions that drill down on small details. If you’re not prepared, or you trip up, you’re done. Oh, the PE firm folks will be nice, but you won’t get a second chance. PE firms have more investment opportunities than they have time.
PE firms are staffed with the best minds from the top business schools in the United States. They are an intimidating bunch. Most of them have zero experience in creating and running a business, but they have mad skillz (as the kids say) in finding the weak points of your business proposition and even your personal flaws. They analyze, question, probe, test, propose scenarios, etc., all in an attempt to see if you and your idea or business are worthy of their client’s capital. Your proposal needs to make sense to have a good chance for success, but it also must fit into certain investment guidelines the PE firm has. All of this means that your odds of getting a “yes” are pretty slim (especially in the wine/brand business which has a lot of negatives from an investors point of view).
As I mentioned above, the PE firm is tasked with acquiring high returns. They don’t look at building businesses in terms of people, dreams, or hopes. That’s not their job, nor should it be. There is a great quote in the Goodfellas movie, where Ray Liotta’s character Henry Hill is explaining the mob’s approach to collecting on debts:
“But now the guy's gotta come up with Paulie's money every week no matter what. Business bad? F*** you, pay me. Oh, you had a fire? F*** you, pay me. Place got hit by lightning huh? F*** you, pay me."
PE firms are tasked by their investors to have the same mentality. It’s all very polite, but I can see their investors telling them the same thing. Clarity is a beautiful thing, especially when it’s really simple… “F*** you, get me my return on my investment.”
The typical “pitch” to a PE firm starts with putting a “book” together that explains your company and/or idea and the request you are making of the PE firm. Be prepared… you are going to have the “MBA patrol” going over all of your assumptions with a fine tooth comb. In fact, they are trying to find flaws in your book so they don’t have to have a meeting with you. They don’t want to waste their time meeting with you if the “book’ doesn’t make it through the first wave of review."
If you actually have a meeting, it will be an experience that will test your business knowledge and ability to handle high-pressure meetings. The only way you get good at these meetings is to do a lot of them. I cringe when I think of the first ones I did almost 20 years ago. I was so bad at presenting in the first couple of meetings, I got sent to remedial “Investor Meeting School 101” to learn how to present. Yikes. Very humiliating. I was unable to communicate the larger vision of the company and explain the detail to support the vision. I got caught up in way too many numbers and didn’t focus on the important numbers. Other than that, I think it went pretty well!
Here are some simple points of advice to conclude:
1. You have to paint a picture. You can’t start with contemporary and end up at abstract. It has to fit together and make sense.
2. Don’t go into these meetings with someone who is a rookie. Find a pro to go with you if you get a meeting.
3. Remember, you called the PE firm up to present your idea. They may make you doubt your ability to add 1 + 1, but if you listen to their questions, you will probably gain insight into your business. It might not be pretty, but it’s probably accurate.
4. And oh yeah, if you strike a deal… just remember: “Place got hit by lightning, huh? F*** you, get me my return”.