Which comes first - capital partners or a great business?
August 30, 2019
by a searcher from The University of Chicago - Booth School of Business in Dallas, TX, USA
This feels like a chicken and egg issue.
I am not particularly good at capital raising - I have long known this, despite lots of experience in that role - I started along the search path at the beginning of the year with the hypothesis that good businesses and strong executive experience would attract capital. That is not playing out.
I have been unable to close on several promising businesses because I could not attract sufficient capital in a timely manner to get deals done.
That has me thinking, I need to solidify capital relationships before finding businesses, but every capital partner I am talking to is asking about the business I am looking at. I am using some of the missed businesses as analogs and uniformly I am hearing they would have been interested in those types of deals. Yet when I actually had the fish on the line and it was time to reel it in, I got almost no response from many of the same types of firms.
I don't know if I am not bringing the right deals to the table, or am packaging them wrong, or approaching the wrong investors, or have unrealistic expectations etc. I am getting no feedback or signals from investors on why they are passing.
Reading through the forum, I seem to be doing what others are struggling with, finding attractively priced businesses with strong growth potential. I am striking out on the capital though.
How do I best address my funding issues so I can confidently move forward on future businesses with a strong expectation of ability to close?
About me: Chicago MBA, seasoned entrepreneur and executive, CEO experience, operating partner role at large PE firm, have grown two businesses by more than $100 million in annual revenue, self funding search and have ability to co-invest.
from The University of Chicago in Dallas, TX, USA
The process I have been through feels like a major disconnect in the industry and possibly a good opportunity for some focused firm to bridge that gap.
Biggest frustration is how often I hear how capital providers cant find enough deal flow to deploy all the capital they have. How they want to partner with experienced executives to acquire companies. How they are more focused on the executive than the industry.
I have had dozens of "introductory" conversations outlining targeted opportunities, more than a few of which came from very warm introductions - current investors in funds, portfolio executives, service providers with pre-existing relationships etc. Almost all of which have lead to "you are exactly the type of executive we are looking for" type of responses with encouragement to reach back out when I have a live deal.
Having secured a number of strong and encouraging potential partners I would then focus on sourcing a great deal only to be unable to get financing because the deal was not right for any number of reasons - frequently no reason at all was given. Not once have I been told my background or targeted industries were a bad fit.
I repeated that strategy of rounding up potential investors several times approaching different types of investors in different ways each time, Convincing myself I had just not been working with the right potential partners. Only to have the same encouraging conversations with identical results - no deal.
In the 18 or so months I have been doing this, I identified several strong targets that fit my background and experience and had strong growth potential at attractive valuations. After not being able to source funds to complete those deals, I pivoted my approach and currently have an LOI for a business I can take down all by myself without equity partners.
I am thrilled with the company and its prospects. I will almost certainly do better financially in all but a total loss type of scenario. I also wont have some 3rd party looking over my shoulder and questioning every decision just to make them feel like they are engaged. I have significant experience working with investors and boards and the one underlying constant has been how little they know about actually creating value, but in the same breath how good they are at misdirecting resources at low value projects.
So I would say I am very close to successfully ending my search but was not at all successful in sourcing investors. Unfortunately, I dont think that means a happy ending for the average searcher following in my footsteps. I was fortunate enough to have the resources to self-fund both the search and acquisition and that is probably not the case for many.
from University of California, Los Angeles in San Francisco, CA, USA
That being said, knowing when you have a strong enough network of potential investors is nebulous, and I'd welcome anyone's thoughts on when you really know you've lined up the right partners.
All capital partners will say they'll look at a deal if it's on the table, but how does a searcher really know when they have a deep enough bench to run with? A deal could easily fall through otherwise, and I'm sure this is a common issue for many.