I’m seeing more and more growth equity financings come to market with an over-sized component of the financing allocated to existing shareholder liquidity. I’ve seen enough of these transactions to consider it as a trend and to wonder what is motivating it.
Founder Liquidity in Context
Whereas liquidity isn’t typically a feature of venture financings, it is often – but not always – a feature of growth equity financings. A modicum of liquidity for key management team members or founders can act as lubricant for a growth equity investment, particularly where the management team founded and has successfully bootstrapped a successful business.
I just wrapped one of those calls where I had the opportunity to give advice to an entrepreneur that runs counter to my short-term interests. In this case, it is a story of a first-time entrepreneur who has built a $7 million revenue business and is wrestling with the decision whether to take growth capital or sell the business. He owns the vast majority of the company and he has a fair offer from a strategic buyer that emerged during the course of his exploring financing alternatives.
After meeting yesterday (our third meeting or so), I committed to outlining how a growth equity investor would structure an investment transaction for his business.
Restrictive covenants are standard features of venture capital, growth equity and private equity transactions although each investor type has its own standards. Restrictive covenants are the actions a company cannot take without investor approval. A short list of typical restrictive covenants includes:
I’m not a huge football fan. But I do marvel at the drama of professional football.
In particular, I admire what Peyton Manning has done for the Broncos the past two years. His individual contributions are well documented. But what I’ve been most impressed by is the positive impact he seems to have had on the rest of the team. Sports are a great metaphor for many aspects of life. In this case, entrepreneurs could learn a lot from Peyton Manning and the leadership he’s brought to the Broncos.
A discussion with a portfolio company CFO yesterday reminded me that statistics are a dangerous thing and averages are misleading.
“There are three types of lies — lies, damn lies, and statistics.”
Most businesses analyze their performance using overly simplistic tools. For an extreme example, imagine a scenario where the average customer produces monthly recurring revenue of $10,000.
When an investment passes our first-screen at Meritage Funds, the first deep-dive we typically do is on the unit economics of the business. Unit economics are the fundamental financial building blocks of a business. If you can pin down the unit economics, you can determine contribution margins, break-even points and perform ROI calculations all of which can help to determine whether a Company’s economic engine works. Without an understanding of unit economics, predicting whether a business can be profitable in the long-term is all guess-work.
By now, you should know where you stand relative to your 2013 budget. Hopefully, you made it or beat it. For some, the finally tally will show a “miss to the downside”. When i say miss, I’m referring to performance against the original budget – the one you put together in December 2012. Performance against the 2013 re-forecast you prepared mid-year (hopefully not multiple times throughout the year), isa separate matter. The fact that you had to re-forecast because of downside miss is a signal in and of itself.
So, you missed; now what? The first thing you should do is ask yourself: Why?
Growth equity is increasingly being recognized as an investing discipline that is separate and distinct from venture capital. That being the case, how does one distinguish between a venture capitalist and a growth equity investor. In my mind, growth equity investors are hedgehogs; venture capitalists are foxes. Allow me to explain.
Earlier this week, I participated in a panel discussion organized by Holland & Hart, a Denver-based law firm that has a strong practice area working with entrepreneurial growth-stage businesses. The topic of the panel was “After the Honeymoon”, focusing on investor/entrepreneur relationship dynamics in the critical period following the closing of an investment or acquisition transaction. Also on the panel with me were Matt Hicks of Excellere Partners and Flint Seaton, CFO of Accellos, an Accel-KKR backed business.
I have to say “No”; alot. In fact, every one of us investor-types says “No” much more than we say yes. How we say “No” matters; alot.
Sometimes, you don’t know you have said “No” well until years after the fact. Today, I had one of those moments. Several weeks ago, Todd Vernon, founder and former CEO of Lijit and now, founder and CEO of VictorOps asked to have lunch. I didn’t ask the topic, because we’ve known Todd for a long time and because I like Todd. We had lunch today.