| ign="center"> | | | | expectations. On the other hand, an investor with a |
| As venture capital and private equity continue to | | | | more nuanced understanding of your company would |
| make news headlines, entrepreneurs may find it | | | | work with you to increase its value in a realistic and |
| challenging to distinguish fact from fiction. | | | | sustainable way. |
| 1. Do investors win at the expense of entrepreneurs? | | | | Myth #3: Private equity investors don't add value |
| 2. Are investors out to wrest control from | | | | because they haven't been in an operating role. |
| management? | | | | Most entrepreneurs have ample experience with |
| 3. Is an investor's sole focus on the final liquidity | | | | operating issues. In fact, that's one of the main |
| event? | | | | reasons private equity investors should not try to |
| The Five Myths of Private Equity. | | | | micromanage portfolio companies. However, they can |
| Myth #1: Private equity is a win-lose game -- | | | | add value by challenging management to think outside |
| investors win, entrepreneurs lose. | | | | the box. |
| According to this myth, private investors somehow | | | | Investors who have backed many different |
| make off with the value of your company -- perhaps | | | | companies at rapid growth stages can recognize |
| buying at a too-low price and cutting you out of the | | | | patterns that may not be obvious to the |
| eventual rewards that you'd earn from going public or | | | | management team. They may have a network of |
| selling to another company. Remember, though, that | | | | relationships that can also assist companies in |
| private equity investors only make money if the | | | | recruiting talent at the board and management level. |
| value of your company appreciates -- and, in most | | | | They can often help companies explore strategic |
| cases, the entrepreneur retains a substantial interest | | | | partnerships with other firms. |
| in the business. After all, it's in their best interest to | | | | Myth #4: Taking venture capital/private equity |
| help you grow your company and increase its value. | | | | money means you lose control of your company. |
| Almost by definition, if the investor wins, the | | | | If you take on a minority investment, you can |
| entrepreneur wins. | | | | continue to control your company -- making all |
| Moreover, a private equity investment provides | | | | operating decisions and having the ultimate say over |
| entrepreneurs with the opportunity to diversify their | | | | strategic issues. Selling less than half of your |
| assets. You receive cash for part of your share in | | | | company leaves you in charge, while providing liquidity |
| the company, which you can spend or invest as you | | | | to you and other early shareholders. |
| see fit. As a result, you immediately reduce your | | | | Myth #5: Private equity investors are only interested |
| exposure to events at a single company, in a single | | | | in your exit strategy. |
| industry -- and can access cash that you may need | | | | When a private equity firm invests in your company, |
| for retirement, college tuition, or major purchases. | | | | they do expect to exit their investment within the |
| Myth #2: Valuations are the only consideration when | | | | next five to seven years. Since the firm has limited |
| you're shopping the deal. | | | | partners who expect liquidity at some point, they |
| Valuation is certainly an important consideration since | | | | can't hold their investment forever. However, this |
| you want to get a fair price when you sell your | | | | doesn't mean that your company will have to sell |
| company. However, it's equally important to partner | | | | your company or take it public. Alternatives might |
| with an investor who shares your goals and who will | | | | include recapping the company with bank debt, |
| work with you to achieve them. When you focus | | | | swapping out one investor with a new private equity |
| exclusively on valuation, you risk ending up with a | | | | investor, or raising capital from a strategic partner. |
| partner who doesn't understand your company, your | | | | In any event, your private equity partner has a |
| growth strategies, or your industry. | | | | vested interest in growing your company over the |
| Let's say, for example, that you sell your company | | | | next several years up to the exit event. Their goal |
| to an investor whose expectations for your business | | | | during this period is the same as yours: to increase |
| are unrealistically high. You may obtain a good price | | | | the value of your company by expanding the |
| for your company, but that relationship is likely to | | | | business. |
| sour as the business fails to meet the investor's | | | | |