After few years of inception, many businesses face challenges of scaling up to the next level. While identifying the next level is crucial, reaching to the next level perhaps brings down the number of the companies survived than were born. The most common reason for failure of these companies can be attributed to inadequate funding.
A PE investor is the angel of your firm who gives a company wings to reach to the next level. PE is not for startups, rather meant for those were born a few years back and have a good amount to quote as an annual turnover plus if the business has a prospective future. Here we will not talk about the benefits PE investors bring in to the table. We will try to get into the shoes of an entrepreneur to understand how he would get PE funding.
Checklist for entrepreneurs
Before approaching PE funding, an entrepreneur enquires – if the PE funding company has enough knowledge of the market; if they are capable to finance them to that specified period of time; what their research says, if the PE company’s investment policy is matching with their business requirement; and apart from capital investment what other add on values a PE funding company can give to them.
Elements that a PE firm look in a company
It is the business plan which plays a crucial role to impress a PE investor. In addition, good management team, a promise to steady growth is other parameters an investor seeks. Most PE investors target 25-30 annual returns irrespective of which the market goes. Also, PE investors see if the company has enough dedication and passion for their business. However, apart from meeting all these criteria, an entrepreneur should consider keeping their books clean with respect to taxation and profitability. The investor company needs to see growing revenues and profits to get convinced that it is a good investment proposal.
Alok Mittal of Canaan Partners India shares, “The key elements we look for is a large/growing market, with favorable trends to support the business; great team with execution track record; and ability to build sustainable differentiators over time.”
The exit point
Apart from IPO there are other parameters also to mark the exit point. The exit need not be only through IPO – it can be through another investor or owner buying out the PE with the right pricing. The exit term & conditions are generally decided in the business plan itself. But this plan is under constant evaluation. If fund needs to exist and value/ time is not correct then it may even look at to sale the stake to other funds too. Mr. Mittal says, “Exit timeline is often predicated by progress of the business, and how prominent it is beginning to be in strategic terms. Apart from funding, we involve ourselves actively in board, and help the companies in strategy, senior level recruitment, business development etc.”