10 Do's and Don'ts to Finding the Right Growth Investment Partner

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Andrew Lindner

Andrew Lindner

Managing Partner

July 12, 2017
Thought Leadership

In the life of every successful company, there has been an inflection point where external aid can help take the organization to another level. Often this comes in the form of a growth investment, perhaps from an institutional lender or private-equity firm, and is frequently accompanied by management guidance that can help unleash a company’s true potential.

As managing partner of a middle-market private equity firm, and earlier in my career as an investment banker for one of the world’s largest financial institutions, I’ve evaluated thousands of such prospective relationships. While of course the dynamics of each deal is different, over time I’ve identified some common traits that make for a successful investment partnership.

If you’re in the market for a growth investment to propel your company to its next level of success, here are five “Do’s” and “Don’ts” to help attract and cement the ideal partner.

Do:

  1. Show how your company operates in a large and growing market. Investors aren’t looking for a flash-in-the-pan, but a successful company that solves an existing or emerging need…bonus points if you can do it better or more cost-effectively than your competitors!
  2. Illustrate consistently high levels of growth. The key here is sustainability vs. sharp highs and lows in performance. It’s OK if you’re currently stuck at a plateau – that’s why you’re seeking a growth partner – but be prepared to show how a capital investment will unleash your company’s real potential.
  3. Establish yourself as a market leader. This can be measured by any number of factors including: market share, reputation, innovation, value proposition, etc. But it’s vital to recognize that investors like to run at the front of the pack.
  4. Be prepared to demonstrate profitability. This seems fundamental, yet many entrepreneurs will forego profitability in favor of growth. While speculative investors may be willing to overlook the bottom line for the potential of a big payday, everything you worked for can be jeopardized if the business model is flawed and that payday never comes.
  5. Assemble a high-performance management team. Every successful business is comprised of three basic parts: a great idea, sufficient capital to operate, and a group of talented, dedicated individuals to provide leadership and direction. Don’t be afraid to surround yourself with people whose knowledge and talents complement your own.

Don’t:

  1. Set expectations within your company for the value of your organization. If you have a number in mind, keep it to yourself for now. Let the market set expectations so your team can get behind any deal you feel is worth pursuing.
  2. “Publish” your asking price. You could be selling yourself short or driving away potential partners who think your expectations are unrealistic. Additionally, avoid making comparisons to the valuation multiples of publicly traded competitors as the stock market is a notoriously flawed method for valuations, especially among companies in dynamic categories like technology.
  3. Focus on short-term gain at the expense of creating long-term value. The two are not mutually exclusive – you can almost certainly liquidate some of your equity while helping grow an organization that will be worth even more in the long run, which is the ultimate goal of any investment partner.
  4. Forget to do your due diligence on your potential investment partners. Don’t just go for the biggest name, really dig deep to learn all you can about their track record of growing companies. Talk with the CEOs of companies they’ve had success with – and those where they haven’t – to see what you can learn about how they like to operate.
  5. Take for granted that the proposed deal is guaranteed to close. You don’t want the deal to fall apart at the 11th hour and have to start all over again, or have to back out of commitments you made contingent on the injection of new capital.

Like a spouse or significant other, finding the right growth investor can be an elusive process. But in the long run, taking the time position yourself well and do your homework will be more than worth the effort.

Andrew Lindner is managing partner focusing on software and tech-enabled services investments for Frontier Capital, a growth-oriented private equity firm based in Charlotte, North Carolina. Contact him at alindner@frontiercapital.com.

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