OK, so the odds of that happening ‘for real’ may be slim*, but that doesn’t mean that they wouldn’t each have a gripping story to tell anyway (even minus the booze). If you’ve ever considered raising funds for your company or wondered what it might be like investing in one, you might just find these 3 points of view illuminating.

 

A founder, a VC and a Private Equity investor walk into a bar...

 

The Entrepreneur
Imagine that 10 years ago you established a very innovative company. Let’s call it “Your Company”. Your Company was a result of your brilliant vision and great technological skills. You worked very hard all day long for many months, invested and risked probably most of your savings to get it to a certain point, and were eventually able to create a proof of concept and viable business model so that Your Company could raise a fair amount of capital from leading Venture Capital firms.

Those VC firms supported Your Company for many years, led you through important milestones, helped you recruit the best management team to surround you, opened giant doors for you, enlightened you when your experience was lacking and more. They stood next to you when Your Company moved to Round B and Round C and always put their money where their mouths were. They even brought some of their US colleagues to invest money in Your Company.

They were your trusted partners even when Your Company wasn’t moving as fast as you (and they) would have liked. Your vision may have been a little too premature for the market, your technology may have not been perfected yet on all fronts, and even your limited management experience meant that you weren’t always the best possible CEO for Your Company.

But they stood by you and kept believing in you and in Your Company. After more than 10 years in which Your Company had been through ups and downs to the point that it was almost shut down, you were finally able to revive it. The market changed, you added some more prominent executives to your team, improved technology capabilities and changed the business model. You learned from your mistakes and “forgave” your past performance.

Once again, you felt the same energy that you’d felt at the very beginning, with your instincts telling you to act fast and avoid repeating the same mistakes you’d made before. You were filled with fresh inspiration but you needed money to realize your goals (a lot of money). It finally felt like you were just a step away from making your original vision come true.

The VC investor
Imagine that Your Company was one of your first investments since joining Your Fund. It was 10 years ago and when Your Company came to raise its Round A, and it was so promising that you didn’t hesitate for a second. You were certain that Your Company will be one of those successful giant exit success stories that everyone “oohs and aahs” about for months after.

The first couple of years passed by pretty well and your investment thesis seemed to be on its way to proving itself. You were highly involved in Your Company’s activities and could see that the market was becoming ripe for the vision of its innovative developments.

But then, all of a sudden, the market took an unexpected turn, or maybe the technology wasn’t good enough, or maybe the management floundered, but for whatever reason, Your Company found itself in distress.

Nevertheless, you continued to believe in the founder, the products and the market. You were sure that although the road was proving to be much longer than you expected, through hard work, your constant dedication and more capital, Your Company could reach its goals.

But the hard times continued longer than anticipated, and only recently Your Company was able to get the traction that it had been predicted to achieve a few years ago. With renewed hope and opportunity, the founder tells you that he needs more money to take the company to the next level. The more money he raises, the faster he can move forward, he tells you. But you are not so sure it is absolutely necessary.

In addition, things are no longer so simple. The investment was made in a now slightly ‘aged’ vintage year of Your Fund. You can only inject a small amount of additional capital in Your Company. Your other team members are not as confident as you are that Your Company will be a great success, and they are not sure that you should inject more capital at all. Any additional money that would be invested in Your Company will dilute Your Fund; the more capital, the more the dilution. And what if eventually Your Company would reach an exit, but a moderate one? You’d need to also take that into account in case of a downside scenario.

As it turned out, the Founder was able to bring to the table a prominent PE investor. These are sophisticated investors with a very relevant background to Your Company. They offer to bring a large check as well as added value, but they have other demands that Your Fund just cannot accept. If they are not able to be more flexible, you are afraid that this deal will never happen.

The PE investor
Imagine that you’re a private equity investor who has watched many companies from the sidelines over the years, essentially waiting for them to reach the threshold expected by your fund’s specific investment criteria, which is usually annual revenues of above $10 million or close to it (this sum changes from fund to fund).

The usual check size of a private equity fund is often higher than that of the VC’s first check and it is given in one installment. Also, unlike the VCs who are pursuing a “dream company” that will bring them a profit of 10 times or more on their original investment, a private equity fund is more down to earth in this respect and needs to see a return that’s around 3 or 4 times the size of their investment. To reach this level of return the PE fund helps with the company’s operations and works closely with it to achieve business expansion and other value-creation processes.

Imagine that you have been following Your Company from its very early stages: You’ve seen it rise and fall over the years and you just recently heard that it has been recuperating very nicely and needs more money to grow.

Your team warns you that this is really a waste of time: Your Company had raised a lot of money in the past, has a large amount of liquidation preferences (certain preferences to institutional investors on the return of investment) and a strong presence of VCs at the table. They warn that just as with similar past cases, your investment will not be considered large enough and eventually the existing investors will inject smaller amounts of money in order to minimize dilution and prefer to continue without introducing a new investor.

Despite your team discouraging your interest in Your Company, you were not willing to give up so quickly. It’s obvious that Your Company needed a fair amount of money in order to scale up fast, stay competitive and not be left behind once again.

You have so much to contribute to Your Company, your background is precisely in Your Company’s market. You think that the combination of your PE fund’s capital and your expertise could help bring the company to where its founder and investors envisioned. But you have to be cautious. You have to make sure that even if Your Company does not reach its ambitious heights, you can still return to your fund at least 3x on your investment. Otherwise, it is pointless, and although things may seem rosy now, you can’t tell how they will turn out tomorrow.

Unfortunately, when you submit your term sheet for potential investment, the feedback you receive is as cold as the middle of the ocean on a winter’s day. The dominant VCs are vetoing your terms, and while they agree that an injection of capital could boost Your Company’s growth, the conditions and terms you proposed are too difficult to swallow.

So how does the story end?
The true story you just read is based on a very specific scenario that I have experienced in my own Private Equity firm in order to illustrate two important messages:

Firstly, although as a private equity fund we present complex term sheets to our investment targets, it’s not because we are detached or don’t understand the interests of the other parties involved or because we disregard them, but rather because when a company reaches its tenth anniversary (more or less), it is no longer a “simple” company and an investment in it is no longer a simple transaction. We have to be creative in order to achieve ambitious goals, so this sometimes results in cumbersome proposals.

The alternative is to not submit a term sheet at all, and that way we could avoid being accused of “not understanding the dynamics” of a particular investment’s potential, but I think that a founder or CEO of a company would prefer to receive an offer and decide for himself if he wants to accept it or not, rather than have us not make an offer at all because we have presumed in advance that he will not accept it. Visionary company leaders deserve more credit than that even when a deal seems complicated, so if we feel that an investment is worthwhile, we’ll always give the founder the benefit of the doubt.

Secondly, usually a private equity investment (at least in Viola Private Equity’s case) isn’t purely financial investment. It also involves a lot of value creation, assistance in determining growth strategy, recruitment of top management, financial discipline, opening doors through introductions to new potential customers, help to better understand and identify market trends, and providing access to exit channels.

In particular, for companies that were led by the same people for a long period (10 years or more), a fresh outlook is required. As such, our investment proposal and term sheet should be read in the context of giving the company new tools and a new vision to help it grow. So if the valuation or the terms seem a bit too harsh to swallow, it’s only for the short term, while in the long run, all parties involved and the company itself in particular, can ‘win’ much more.

In the end, ‘Your Company’ is not just the Founder’s, or the VC’s, or the PE’s Fund. It belongs to all of them, so it’s in all of their interest to see it thrive and succeed. At which point maybe the celebratory drinks in the bar thing might not be so far-fetched after all…

 

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