The Do’s and Don’ts of Private Capital for Entrepreneurs

Here are four things you should do, and four you shouldn’t, when it comes to private capital.

Here’s a hard-earned lesson for entrepreneurs who might take funding at any cost just to achieve their dream: The most critical factor in identifying a PE Investor partner is how well you align with the PE Investor. That sounds simple enough, but it’s not.

Getting funded may seem like the goal, but that’s short-sighted. The real objective is to use the capital and expertise of the PE Investor to grow the company in ways that benefit everyone involved. That means having a PE Investor partner you can live with after the deal is signed.

To break it down in terms every entrepreneur can use, here are some of the important “do’s and don’ts” for a successful PE Investor partnership — all designed to ensure maximum alignment.

The best practices for a successful PE Investor partnership boil down to making sure you’re not an outlier in the PE firm’s portfolio. Here are four actionable ways to achieve that:

1. Make sure you fit the PE Investor’s funding and investment strategy

Your deal size should be in the same range as other companies in the portfolio and your investment timeframe should be typical to theirs. The PE Investor’s investment timeline is driven by the agreements it has with its investors and each PE Investor has a different time horizon. For example, large institutional investors generally require shorter timeframes and family office investors often take a longer view. Partner with a firm that has investors who will stick with you for your optimal investment cycle. 

2. Target PE Investor that have interest and experience in your industry

Interest is more important because you can help frame the PE Investor’s passion and they’ll dedicate the resources to understand your business and help it grow. Having industry experience facilitates due diligence because they know the nuance of your space.

3. Understand the PE Investor’s decision-making process.

Be very practical and ask for stories about how decisions are made. Interview the CEOs of past and present portfolio companies to verify what you’re being told. All’s fair in private capital funding.

It’s important to follow through on these references. For example, conversations with the founders or CEOs of companies recently receiving investment from the PE Investor may enlighten and reassure that you are making a smart choice.

4. Find out how the partner responsible for your investment gets paid

The key question: “Do you make money if I make money?” Ideally, you want a PE Investor partner who has personal skin in the game so your wealth generation goals are aligned.

The “don’ts” of private capital funding are about navigating the process without naiveté. Here are four traps to avoid:

1. Have a good look around

Remember, the PE Investors need you, too. They have investor money to grow and are looking for proven leaders with solid business models. Understand as much as you can about the details of the paperwork before you sign an exclusive arrangement that takes you out of negotiations with other firms. With every deal, the devil is in the details, and you won’t see that until you review the transaction agreements. Partnership cuts both ways, and your decision to trust the PE Investor is matched by their decision to trust you.

2. Don’t be afraid of “thorough” money — and beware fast money

Don’t be afraid of someone being thorough with you. Things don’t always work out as planned and the PE Investor that does its homework is better equipped to navigate, rather than berate, its way through the storm.

3. Don’t cheap out on your advisors

In particular, hire an experienced transaction lawyer. Lawyers can save you time and anxiety because they know what’s standard in private capital deals, meaning they can set realistic expectations for you. They also know when the PE Investor is offering something good or rare in a deal — another sign of alignment with the right partner.

4. Don’t be defensive when the PE Investor offers operating expertise

Most entrepreneurs read this as interference, but it’s a valuable advisory resource. With a good PE Investor partner, you have access to directors who add to your strategic brain trust, shared services, including human resources, and credible introductions to other investors and better banking relationships.

The two keys to a successful PE Investor relationship are to make sure you fit the PE Investor’s investment profile and knowing how to navigate the funding process. Doing these things right will provide the kind of alignment you need for a partnership — one that can withstand the challenges that inevitably visit every entrepreneurial venture.