2019 Smart Funding Summit: 10 Takeaways
“We are going to date each other for 90 days and then become roommates for the next 5 years.”
- Mike Smiggen, Co-Founder, Montauk Corner Partners, On how Private Equity funding works
On May 2, 2019, BIG YAM hosted Arizona’s first-of-its-kind Private Equity Summit. The event merged a panel of business services professionals together with business owners, and private equity dealmakers (see list of the participating Private Equity firms below). Arizona is now on the investment radar of Private Equity firm as the state continues to give birth to innovative, fast-growing companies. After digesting the event, I share with you my most helpful take always;
1. Size, Structure, and Story.
Ms. Lena Dalbey, Managing Partner of LINK CAPITAL (LINKBIG.NET) was asked; How do Private Equity firms evaluate investment opportunities? Ms. Dalbey’s answer;
“As a professional investor, I look for established companies with stable revenues. I then look at the size of the market potential, our objective is to use our capital to capture more market share for the business owner and our firm. The structure of the investment then becomes critical, I need to know that the proposed valuation and what the percentage of the company the business owner is willing to give for my investment. Size and structure are related as we would like to know if we’ll be investing in a $500 million opportunity, or a $5 billion one. Lastly, if the business is in the right industry, has strong revenues, and the size and structure makes sense, then the story, the team and the Brand become important.”
I immediately wrote Ms. Dalbey’s answer in my phone notes with the comment;
“How to set up your pitch deck”
If you have a Pitch Deck or are creating your pitch deck for presentation to private equity firms consider dividing the sections into SIZE, STRUCTURE, and then STORY.
2. Nobody will sign your NDA!
Robert Maynard, the CEO of SurchX and the former Co-Founder of LifeLock is a Private Equity veteran and was one of three panelists featured at the event. Robert is a serial entrepreneur who has created over $7 billion in value for investors. An audience member asked Robert what to do if a Private Equity firm will not sign an NDA (nondisclosure agreement). Robert’s answer was echo by nearly everyone; “Nobody is going to sign your NDA, forget it.” Robert added; “There is someone right now working to develop your idea or something like it. A Private Equity firm is not going to open themselves up for liability by signing your NDA, which by the way may not be enforceable anyway.”
3. Brand is far more valuable than Patents.
Craig Weiss started his career as a Patent attorney and later became the Founder, President, and CEO of NJoy. He also is the Founder of Aladdin, and Retainer Club. Craig was asked about the value of a company’s Patents over its Brand and his response was perfect. “If today Google lost all it Patents you would still use the Google search engine. If Apple lost all its iPhone Patents consumers would still buy Apple.” Today the Brand has far more currency than the Patents. Craig’s assessment was later echoed by Stephen Boatwright, one of six Business Service Panelist (see list below). Stephen is a Partner in the Law Firm of Gallagher and Kennedy and specialized in representing clients in Private Equity transactions.
4. Do you want to grow fast or slow?
When asked if a company should consider Private Equity financing, Craig Weiss responded; “Equity financing is really a decision about growing fast or growing slow.”
Given the rate at which companies are scaling and growing, not taking a Private Equity deal may be an unintended death blow to a company as the competition may be willing to take it and grow fast.
5. A fast NO is valuable
Peter Sturgeon is the Managing Partner of Sorenson Capital. Peter was asked about the length of the due diligence period and offered the following. “I can give you a NO in a few minutes base in the revenues and industry.”
A fast no is extremely valuable as it allows the business owner to quickly focus on other potential investors.
6. You must be right, and it must be the right time.
Craig Weiss started the e-cigarette company NJoy in 2006, more than a decade before the industry leader JUUL, and well before the idea of electronic delivery of nicotine was in the public consciousness. Craig was asked about the challenge and forging both an industry and a company. He offered an excellent answer;
“As an entrepreneur, you have the burden of being both right about your product or service and you need to deliver it at the right time.”
7. Relationships matter.
Chris Brown, Vice President of Business Development for Montage Partners and Mike Smiggen, the Co-Founder of Montauk Corner Partners both agreed that in the Private Equity world relationships matter. “We are going to date each other for 90 days and then become roommates for the next 5 years.” Offer Mr. Smiggen. What this means is that after the due diligence period the company and the private equity firm become partners in growing the revenues and profits of the organization. This relationship will continue for 5-7 years before there is an exit of a sale or mergers.
Jerry Bostelman, the Founder of Vaco offered a fantastic story of how he got beat up on his valuation by “Lucius” one of his first investors but who later became his greatest mentor. “I offered Lucius 17.5% of my company, he told me that I was going to own 17.5% and that I would be lucky to earn my way back to 49%. On September 11, 2001, our industry imploded, and all our investor wanted out, except for Lucius, he stood beside us and encouraged our other investors to do the same. My relationship with Lucius was worth more than any amount of money.”
8. Lots of money, few deals
Ryan Smeets, Vice President of Business Development at BIG YAM, explained the current state of Private Equity in terms of Valuation and Multiples. The takeaway is that there is currently; “Too much money chasing too few deals!” (Can you in that slide here).
9. EBITDA’s and Valuations vary
Private Equity firm have different appetites for EBITA’s (Earnings before interest, tax, depreciation, and amortization) and Valuations. Some of the PE firms look for EBITDA's in the $2M - $10M range, others will go as low and $1M and still others will look at a deal with EBITDA at $50M.
Valuations are all over the map and are always the subject of negotiations. Business owners push for higher valuations while investors are much more conservative.
Mike Smiggen, the Co-Founder of Montauk Corner Partners offered a takeaway idea of augmenting an equity investment with a subordinated debt financing facility. This would allow the business owner to give up less equity while securing the capital needed to grow the company.
10. Arizona is next
Ryan Smeets of BIG YAM, summed up why Arizona is now in the Private Equity Perfect Storm.
“Wall Street is considered overvalued by many investment firms; PE is searching outside of Silicon Valley and New York for deals. Companies are moving from the coast to business-friendly states like Utah, Colorado, Texas, and Arizona to set up shop. Arizona has proven that it has the talent and now the food chain of capital investment; angel, venture, and now private equity to become the new Private Equity Boom Town.”