January 22, 2013
Interviewed by: David Snow
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Marriage Tips for Entrepreneurs and Their Capital Partners

Partnering with a private equity firm for long-term growth is like getting married: be sure to choose the right partner because breaking up can be a mess.

Chris Masto of FFLJeffrey Bunder of EY, and Deepak Sindwani of Bain Capital Ventures share expert insights in the second of a three part thought-leadership series, “Igniting Growth and Innovation: Private Capital and Entrepreneurs.” The segment ends with an expert Q&A with Bunder of EY, sponsor of this series.

Partnering with a private equity firm for long-term growth is like getting married: be sure to choose the right partner because breaking up can be a mess.

Chris Masto of FFLJeffrey Bunder of EY, and Deepak Sindwani of Bain Capital Ventures share expert insights in the second of a three part thought-leadership series, “Igniting Growth and Innovation: Private Capital and Entrepreneurs.” The segment ends with an expert Q&A with Bunder of EY, sponsor of this series.

David Snow, Privcap: Today we’re joined by Chris Masto of FFL, Jeff Bunder of EY, and Deepak Sindwani of Bain Capital Ventures. Gentlemen, welcome to Privcap today. Thanks for being here.

We’re talking about growth stage companies, and I’d like to really focus on you could call them marriage between a growth stage company and the growth capital that might support it in its next stage of growth. It is a bit like a marriage because you can kind of pick the wrong partner, or if you pick the right partner, it can go very well. So let’s talk about how to make sure you have the right partner, and once you’re married that you’re taking the right steps to make that partnership work.

Maybe starting with a question for Chris, an entrepreneur who has reached a certain level of success is going to have a lot of opportunities to take in capital, so the capital’s almost become commoditized. So what are some ways that the entrepreneur should evaluate potential capital partners, private equity firms, et cetera, who might help them get to the next digit growth, versus a group that might not be as helpful?

Christopher Masto, FFL: I think actually the first quick comment I would make is just that we often find we’re investing in businesses or coming into a company where sometimes our capital is primary capital to fund growth and other initiatives, and sometimes we’re providing some liquidity to shareholders. And so, there are many times where we’re exploring transactions with a business that doesn’t actually need capital.

And so, the first question, back to this marriage analogy, is that it’s important for entrepreneurs to really decide are they interested in getting married, and what kind of a spouse are they interested in? And I think entrepreneurs who have been successful building a business and have been used to doing things in certain ways aren’t always really interested in changing that arrangement and bringing in someone for a real partnership. And so, I think that’s a real critical question first, is what are they looking to do, and what’s important to them?

But once you get beyond that question and an entrepreneur is looking at bringing in a partner, I think a number of things are really critical to getting to the right fit. One is really a question of when can people bring to the table in terms of skills and capabilities and experiences? And there are a number of firms that are much more focused on finance and investing in terms of the backgrounds of people that they bring together, and there are other firms that are built up with more diversity in backgrounds.

That’s always been our was we wanted to build a firm with real diversity in terms of the skills and experiences complementing the traditional finance and investing skills with strategy and operations and being able to more broadly contribute to the company success.

Snow: Jeff, you have a lot of clients who must reach a certain stage and decide they possibly might want to take on private equity partners. They must come to you and say, what’s the difference between all these guys? Which one should I pick? I don’t even know how to evaluate them. What’s some advice that you give to them?

Jeffrey Bunder, Enrst & Young: You mentioned about capital meaning commodity. I think you can certainly look at it that way, but then when you start looking at the options, that’s where the differentiation is. And I think there’s time well spent to get underneath the private equity fund in terms of how they look at investing in growth capital, what their experience has been, and walk through those individual experiences or individual deals that they’ve done, to talk through how they work alongside a partner with entrepreneurs.

And importantly, I think there’s an element of sector here that plays a key role. And “sector” is actually too broad a term. It’s actually sub-sector. And in a lot of ways, it’s what the firm can bring to an entrepreneur in terms of that strategic growth vision from a sub-sector standpoint. Because there are skills there, there’s expertise that reside in funds, but it’s different across the fund landscape.

Snow: What advice would you give to an entrepreneur, being dispassionate about the strengths of your own firm, who is saying, gee, I’ve got a wealth of options. What kind of a partner should I bring on? What kind of skills and attributes should I look for?

Deepak Sindwani, Bain Capital Ventures: It really comes down to what this entrepreneur wants to do with the business, and I think these guys very eloquently touched on that. But I think it’s what am I interested in the growth capital private equity for? Is it I want to spruce some things up or bring new guys to the table? Am I in this for a shorter period of time or a longer period of time? Do I need to do a lot of team building versus not? Do I need a lot of commercial introductions or not? Those are all things that different firms will understand about a different individual’s business.

So I think it’s definitely an individual decision, and each company’s different, but I think a lot of it, based on what I just said, is about alignment. Do I understand, do I set expectations? Are both sides coming to the table expecting the same things out of it? And that’s really where the best marriages happen in these businesses, is we set those up front, obviously things go wrong in the middle. Do the people that I’m working with have the steadfastness and the character to deal with the issues that come up, as they always do in every business along the way, and then are aligned in terms of what are we seeking to do?

So I think those are the things that I would really try to internalize and understand, is are we aligned on those things?

Snow: I’d like to pick up on the term you just used, alignment of interests. Let’s segue now into making the marriage work. You picked your partner, now what are some things that need to get carefully structured, or let’s say everyone needs to get on the same page, in order for things to work? What are the categories, I guess, of alignment of interest?

You mentioned management. Is that one where everyone has to understand roles might change a little bit? Maybe a little discussion around that?

Masto: There are a lot of elements to alignment, but maybe a few the categories I’d think about are alignment of direction. As Deepak was just saying, where do you want to go with the business, and does that make sense to us? It’s kind of hard for us to get involved in a company if we have a hard time buying into the vision of the entrepreneur. So there needs to be good alignment around where you’re trying to go, what sort of time frame are you all focused on, and what’s the end game?

I think secondly, you have to have economic alignment, and that comes down to the way an investment might be structured and making sure that the right people have the right incentives, both an entrepreneur and a broader management team. And then I think alignment of approach, of how we’re going to work together. Again, what sort of input and partnership process is an entrepreneur comfortable with and how the different firms approach working together with entrepreneurs.

And so, that’s something that we spend a lot of time on in any process of exploring an investment. And again, I think an important element in entrepreneurs choosing who to work with. And then again, as we said before, I think part of alignment is just really that cultural fit and personal chemistry. Private investors get involved, some people think differently about horizons, but in general you’re going to be working together as partners for a multi-year period, and you’ve got enjoy it. So, that’s quite important.

Snow: Well, there are different types of entrepreneurs, right? Maybe we can have a discussion around how the personality or the business approach of the entrepreneur might affect how that going forward vision is carried out. What are some important, let’s call it, personality or management types of entrepreneurs where the outcome would be affected by that?

For example, on one end of the spectrum, you could have an entrepreneur who’s like, I wake up in the morning, I don’t even know what I’m going to do that day. I just wing it, and I’m usually right. Versus one that maybe takes a bit more of a studied approach, maybe comes from a bit more of a pedigree background. So how would that affect the partnership of the private equity firm?

Sindwani: I think it comes back to this alignment issue in terms of understanding roles and responsibilities when you get into bed together, in terms of if you have someone who is, it sounds like, this wing it personality, highly creative, wants to do 100 things at once, does he or she realize that when there’s another investor in the business that we’re going to set forth a strategic plan and try to hit certain goals over a certain period of time. We can’t do 100 things at once. And is there alignment of focus? I think it’s extremely important.

And does the person also realize that if there is alignment of focus that he or she may not be the best person to execute on that. They may be great outside, but you might need an inside person, or vice versa. So I think understanding the personality of the entrepreneur that you’re working with, the founder, whoever the person is, I think is extremely important to putting together the right situation. And hopefully, that could be successful.

The flip side of another personality type you described is the person who, if they’ve been bootstrapping a business for a long period of time, may only be looking one month ahead instead of two years ahead. They may understand the strategy, but they may be reticent to really pick their head up and go for it. And so that’s, again, an alignment around what are we shooting for, over what period of time? And I think it’s extremely important, and different, obviously, based on the two personality types.

Bunder: And in my experience, they’re all strong personalities. There’s differences there, but they’re all strong.

Some of them will approach it as I just want the capital, and once I get the capital, leave me alone. And in my mind there’s a honeymoon period we have to work out and how this marriage is going to work. And those can be pretty dicey times, because in some ways, an entrepreneur may not be hearing the whole diligence process is unfolding as it’s unfolding.

They may not necessarily get it. Everyone, in my mind, is aligned from an economic standpoint. Everyone likes the end game. We look at the models and talk about what this may look like, an IPO or outright sale, and to me that ends up a little bit clouding the scene, because you end up, then, day two is, OK, how do we embark on that road? And a lot of it’s got to be collaborative. In many ways, these entrepreneurs have not been collaborative in the past.

Masto: For us as an investor, if we see someone who is of a wing it approach to managing the business and is not really interested in someone providing some active input, we don’t spend a lot of time on it. And sometimes that’s not so obvious to discern because they’re often well-coached by their investment bankers because they have a goal. They want to raise the money, or sell the company, or sell some of it. And so, that may be their instinct, but they put on a different face. And so, it’s important to really try to understand what people are all about.

Snow: Is there ever an issue around, I guess you could call frugality, where you have a certain kind of an entrepreneur who it’s his money, and so he’s built the company very carefully up to a certain stage, but when it comes time to accelerate that growth and to maybe put a bit more money to work– your money– maybe courage isn’t the right word, but it’s not in his instinct to say, yeah, let’s go ahead and spend that size of check to get us to the next stage. Have you ever come across those kinds of issues?

Sindwani: Definitely. We’ve definitely come across those situations. It’s funny, because we’re all guys who manage portfolios, and in certain situations we love to have that problem. Because sometimes we have guys who are spending too much money, we better random in.

But you definitely have situations, particularly with bootstrap businesses, where obviously the first two, three, four, five years of the business are the most difficult, and if the person hasn’t raised outside money, or have invested their own money, or built up balances on their own credit card, they’ve got a certain feeling about what they put into this, and how much they’re willing to spend, and how fast they want to drive. To me, that call comes to alignment. We’ve definitely seen situations where we need to get more aggressive in this market. We’re in a nice position.

And sometimes that means bringing in complementary skill sets. If the founder, or the founders, have a feeling that my vision is only this big, and the rest of the board thinks the vision’s this big. But hopefully, we try to avoid those situations if we can up front, but sometimes you’ve got to course correct.

Snow: Final question for all of you. What do you say to an entrepreneur who, again, may be exploring the possibility of taking on a private capital partner, but kind of feels a bit reticent and says I’m an entrepreneur, I have been winging it, or I have been following my own instincts up to this point. Is my entrepreneurial spirit going to be snuffed out by taking on these external partners who are going to shackle me to some sort of preformatted plan? What do you say to that person? Either yeah, you’re right, or you’re completely wrong, or what would you say?

Sindwani: I think it’s case-by-case. There are certain folks who, as Jeff mentioned, don’t want to have someone advising them or with whom they need to consult in order to get things done or to make moves, whether that’s buying a business, whether that’s investing a certain amount of capital, other types of moves they might make. And there are others who, I think, will appreciate the value of having someone at the table who’s economically aligned with them. It’s all about maximizing the enterprise value of the business over a certain time frame, and it’s really case-by-case.

I mean, I don’t think there’s a universal situation, but for some folks I don’t think capital is right. Because I think if they can get there without the capital, it just may take a year longer, or there’s a misalignment of the right speed at which to go, then it’s going to be more of a mess to have two misaligned folks at the table.

Expert Q&A With Jeffrey Bunder, EY

Privcap:  Please discuss EY’s history of working with growth-stage companies

Jeffrey Bunder, EY: We’ve had a long history. Some of the household names now that are public, well-established companies were formerly small-growth businesses that we’ve serviced all long the spectrum of growth. And it’s certainly an area that we focused on. We call it an entrepreneurship.

It’s a focus on working alongside businesses as they look to grow and need that level of assistance and support and advice. We’ve been there for these companies and worked alongside these companies. It’s pretty fulfilling, because you end up seeing a business that may have started in someone’s garage that ultimately, over a number years, has moved to become a major player in a market, achieved public-company status. Working alongside those companies is something we value tremendously.

Privcap: What unique challenges do growth-stage companies face?

Bunder: Companies that are in the growth stage are perpetually changing. What we’ve seen historically is these companies are not necessarily best in class in terms of governance, best in class in terms of operations or finance, and need assistance.

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