If you are a successful entrepreneur and have bootstrapped your company without outside capital, I can assure you that private equity investors will seek you out. Selecting the right investor to fund your company's continued growth is an extremely important decision. When the time is right for you to consider an outside financial partner, how do you choose? Here are five things to consider in making your selection.
Before you seek financing, I recommend you give careful thought to your reasons for raising capital -- be it for growth equity, personal liquidity, a management buyout, or a combination of the three. Only by understanding the business opportunity you face -- and the type of capital you therefore require -- can you choose the right investor.
Consider the case of MDVIP in Boca Raton, Fla., an innovative health care startup whose managers were seeking to expand their network of highly personalized concierge medicine physicians into a national platform.
MDVIP's physicians provide a high level of personalized preventive and wellness care to practices of no more than 600 patients. These patients pay an annual program fee for services usually not covered by insurance, including a comprehensive annual physical and wellness plan, a personal wellness website, and a travel-size CD-ROM containing medical records.
When we met MDVIP, the company was at a stage of growth where it had put together the infrastructure for national expansion. MDVIP needed an equity investor to help scale the business and achieve a sustainable, yet rapid growth rate.
Like many firms making this decision, the MDVIP team started with extensive due diligence, evaluating hard factual data on the size, stability, capital resources, and track record of a number of private equity firms. Their goal was to measure each firm's history of success, its level of experience with companies in MDVIP's industry, and the returns it had been able to generate -- not just for investors, but for business owners as well.
MDVIP's team also tried to get a sense of each firm's time horizon, eliminating investors who seemed too short-term or long-range oriented. They knew there was a brief window of opportunity to bring their product to market before competition emerged; so they weren't looking for a partner with a 10-year time horizon. On the other hand, they wanted to avoid partnering with someone who measured success quarter to quarter, since that might sacrifice long-range strategy for short-term results.
MDVIP's President and Chairman, Dr. Edward Goldman, and his team began evaluating firms by interviewing the CEOs of their portfolio companies. Dr. Goldman wanted to understand what it would be like working with a specific firm, as well as how that firm could help his company grow. He was looking for a financial partner that would focus on the big picture, rather than on the operational details -- and, as he once described it to me, "offer assistance without interference."
In the end, Dr. Goldman used these interviews to help him focus on firms that could provide capital, advice, and a network of contacts -- while leaving the company's management team firmly in charge of day-to-day decisions.
Like many entrepreneurs, Dr. Goldman based a good deal of the decision on his personal assessment of the investors. He knew that he couldn't underestimate the importance of chemistry, given that he was going to be a partner with these people for at least five years. His list of questions included:
After carefully addressing these questions, MDVIP ultimately selected a financial partner, accepting a $6 million minority private equity investment in early 2005. With this financing, MDVIP expanded its sales force and put the finishing touches on a proprietary information technology system that linked doctors and patients. Today, MDVIP has 130 affiliated physicians who provide innovative prevention and wellness-based patient care to more than 40,000 patients in 15 states and the District of Columbia.
The importance of personal fit brings one final consideration into play, that of the stability of the investment firm. How quickly do people come and go in the firm? Have its funds performed well enough to retain existing investors when raising new funds? Is a succession plan in place for transferring the firm to the next generation of owners?
A private equity firm that has been stable and successful can help you raise follow-up capital if you need it. Moreover, the firm's success illustrates its expertise in picking dynamic companies to back and in providing the support that allows those companies to grow. In combination, these two ingredients are critical to the success of both the private equity firm and your company.
Choosing the right financial partner can be an important step toward growing your company. Select someone you like who has similar objectives and a proven record of success. In turn, this will ensure that you have a partner you can work with -- one who can help you make the most of your opportunities.
Bruce R. Evans is a managing partner in the Boston office of Summit Partners, a private equity and venture capital firm. His board directorships and investments include Hittite Microwave, MDVIP, optionsXpress Holdings, Pediatrix Medical Group, and Unica.