As your company grows, you may need larger investments and/or more-involved investors. At this stage, you might find yourself thinking about private equity or strategic investors.
Private equity investments are typically reserved for companies on the verge of a large growth boom, and strategic investors are specialized partners who can provide guidance and management help.
What Is Private Equity?
Private equity is capital sourced from high-net-worth individuals or firms that raise and manage shareholder funds. They typically purchase shares in private companies, but they can also purchase equity in public companies with the intention of delisting the business from public stock exchanges.
Private equity investments can be as “small” as $20 million and as high as a few hundred million.
What Is Private Equity?
Private equity is capital sourced from high-net-worth individuals or firms that raise and manage shareholder funds. They typically purchase shares in private companies.
Private equity investments range from $20 million to a few hundred million.
What Are Strategic Investors?
Most investors are classified as “financial investors,” who purchase shares in companies with the goal of generating a favorable return and diversifying their investment portfolio. Strategic investors become involved in the management and operations of the company in addition to providing capital.
Strategic investors are meant to complement existing owners and partners. For example, if you have experience in marketing but struggle with the financial side of the business, you may want to bring in an investor who’s an expert in financial management and can guide your decisions.
Based on needs, strategic investors can get on board at any stage of your business.
When Should I Seek Private Equity?
Private equity investors generally only invest in proven businesses with substantial earnings. They can also purchase a company outright. As such, they usually only invest during later-stage Series C and D rounds.
How Can I Find Private Equity and Strategic Investors?
To find private equity investors, you need to hire an investment bank with specialties in exit opportunities. Your lender, attorney, or accountant may also be able to connect you with a private equity fund. Strategic investors can be found within your industry or a neighboring industry. In most cases, these investors will be dominant players in a sector where you already have professional relationships
How Do I Pitch to Private Equity and Strategic Investors?
If you’re looking to raise significant capital or potentially sell outright to a private equity firm, then you need to demonstrate high upside potential for the next two to three years with substantially less downside risk than a venture-stage investment.
How Do I Manage the Relationship After They Invest?
If a private equity firm or strategic investor invests in your company, they’ll almost certainly get a couple seats on your board of directors as part of the agreement and–depending upon the size of their investment–potentially have control of your board.
What About Potential Pitfalls?
Potential loss of ownership is something to seriously consider. It’s important to be aware of this possibility before you engage with private equity or a strategic investor. By conducting research and considering your options, you can make an informed decision about whether private equity or strategic investors might be a good fit for your business.