How to Find an Investor for Your Business

How to Find an Investor for Your Business

Read time: 3-4 minutes

Introduction & Definitions of the Different Types of Investors

Raising capital is often cited as one of the more difficult exercises in business which is a fascinating paradox given how much of it is available to business owners. Globally, there is over $1 trillion of uninvested capital at the ready to be deployed, so why then is the process of finding an investor so challenging? To start, investors come in a variety of shapes and sizes, and there are a LOT of them to choose from.

Not to worry, we’re here to help. Like any good journey of understanding, it’s important to start by defining key terms to make sure you are clear on the characters you may encounter on your quest to find the right investor for you. Here are the most common categories of investors from which you can choose (no particular order):

 Description of Each Investor Type
Lender 1. LenderPassive investors offering debt in exchange for scheduled principal and interest repayments. This is the most risk averse category of investor who will want to see tangible collateral protecting their investment in the form of assets (e.g. Receivables, inventory, real estate) and/or personal guarantees. Capital from lenders can be used to fund growth / expansion, satisfy short-term cash needs and sometimes allow you to take money out of the business in the form of a dividend.
Angel Investor 2. Angel InvestorHigh net worth individuals who have both the personal liquidity and risk appetite to make non-control investments into early stage companies. Alongside a founder, angels will often be some of the earliest equity capital into a business. Angels will come from various walks of life – in some cases they will have generated their wealth from entrepreneurial or other business pursuits, though they are likely to be passive investors. Angels are frequently part of angel networks that periodically congregate to source and evaluate early-stage investment opportunities.
Venture Capital 3. Venture CapitalA professional source of early stage capital for founder-led businesses that show strong upside potential. Venture capital firms (or, VCs) raise committed capital from Limited Partners and focus on businesses that are frequently pre-profitability (in some cases, pre-revenue). VCs typically invest in a larger portfolio of 20-40+ companies from their fund with the understanding that a mere 20% of their investments will produce 80% of their targeted returns. VCs are usually non-control investors, though many hail from entrepreneurial backgrounds and may be a good source of guidance given analogous experiences.
Growth Equity 4. Growth EquitySimilar to how this definition is situated in this chart, growth equity investors exist somewhere between venture capital and private equity. Growth equity investors may pursue more traditional VC and/or PE-style deals, but the name generally implies that they are making non-control investments into later stage businesses. Because growth equity deals traditionally have less upside potential than VC deals, a growth equity investor will be less tolerant of investment losses and may seek more downside protection than some of the earlier stage investors profiled above. It would be common for a growth equity investment to be “structured”, meaning that their investment would be in the form of a preferred class of stock possessing features not offered to other shareholders (e.g. accruing dividends, liquidation preference, etc.).
Private Equity 5. Private EquityAnother source of professional capital though for established, profitable businesses. Private equity (or, PE) investors raise funds from institutions (e.g. pension funds, endowments, insurance companies) to take controlling (51%+) ownership positions in companies generating positive EBITDA and with strong growth potential. In many cases, PE funds will encourage businesses owners to retain equity (or “rollover”) in the company to create shared interests in supporting future growth. PE investors will usually target a 2-3x return on their capital over a 3-5+ year investment period before seeking an exit. PE funds invest across a wide range of company sizes, though many “middle market” firms pursue founder or family-owned businesses valued at $100MM or less.
Family Office 6. Family OfficeEntities established by high net worth families to manage the wealth and investing activities of that family. Family offices are not mandated to deploy capital in the same way, say, a VC or PE fund might be and may be more selective in the investments they choose to make. This is especially true given that they are investing their own capital as opposed to capital raised from other sources. Further, family offices will often have longer investment horizons, meaning that they can invest in perpetuity in a business given that they won’t have external constituencies looking to generate near-term returns. Family offices can differ in their approach to managing investments in private companies but reputationally skew more passive in their approach.
Search Fund 7. Search FundThese firms are typically led by 1-2 newly minted MBAs that raise funding from high net worth individuals to identify a single acquisition target that they intend to run as CEO post-closing. Search funds frequently elevate recurring revenue services businesses in their list of acquisition criteria and prioritize finding a founder / owner seeking to transition out of the business to create room for the “search funders” to take control of the day-to-day operations. Note that search funds do not have authority over their investors’ capital in the way that a PE or VC fund might as General Partners. Rather, search funds need to present investment opportunities to their backers who then can approve or deny an acquisition.
Independent Sponsor 8. Independent SponsorThese groups will look and feel like private equity investors in many ways, though the primary distinction is that they do not have the capital to invest. Independent sponsors are frequently professionals that were previously affiliated with private equity funds and decided to set off on their own to source and structure deals to be funded by a third party. There are over 300 or so independent sponsor groups across the country, so it is an established population, but it’s important to know that if you agree on a deal, the next step will be for the independent sponsor to find someone to fund the transaction. Often times, independent sponsors shine in helping to identify hidden value in an opportunity where other investors passed.

The many nuances of each investor type can be tough to commit to memory, so here’s a chart that visually summarizes the key distinctions between the various groups:

Step 1: Determine the Type of Investor You Need

Step 1: Determine the Type of Investor You Need

They say a picture is worth a thousand words, so I figured the flow chart below would be a more efficient way to help you determine the type of investor that is appropriate for your business. Once you know what you’re looking for, you can proceed to “Step 2” for instructions on how to build your contact list.

Step 2: Build a Contact List

Step 2: Build a Contact List

So, now you know the type of investor you’re looking for. Here are the information resources you will want to check out to build a list of firms to reach out to:

 Information Resource
GoogleIt may seem a little too obvious, but Google can be an excellent way to find the type of investor you’re looking for. This is because the more sophisticated investors in each category will have invested in developing a digital presence such that they are easy to find. Give it a shot, you’d be surprised with how many firms you can identify this way.
Linked inWhile the majority of LinkedIn connectivity is person to person, you can search for keywords that may help highlight potential investors for your business. An added benefit is that you’ll also be able to quickly identify any connections (1st, 2nd, 3rd degree) to groups that pop up in your search.
Pitch BookPitchbook is a subscription information platform frequently used by investors and companies alike. The user interface is highly intuitive, and they frequently make feature updates that make it ever more powerful as a search tool. Start by requesting a free trial – this may be enough to build your initial list or you may find value in becoming a subscriber.
CrunchbaseThis is another business information platform centered around companies and investors. It offers a searching tool that allows you to filter their database of thousands of contacts and home in on the types of groups and people you are looking for. Similar to Pitchbook, certain features require a subscription, but you can access a free trial.

Step 3: Reach Out to Your List of Contacts

Each category of investor has their own distinctions in terms of the types of companies / situations in which they invest and, similarly, the way you get in touch with each of them is also nuanced. So, once you have your contact list in hand, here’s how to get in touch with each type of investor directly. Please note, though, that a warm intro into someone at a firm in which you are interested will always be preferable to a cold outreach. This guide is simply to point you in the right direction if you can’t get such an intro.

 How to Get in Touch with Each Type of Investor
Lender 1. LenderLenders will frequently employ business development officers (BDOs) whose primary job is to identify commercial lending opportunities. These professionals are compensated based on their ability to surface leads, so they should respond ASAP to any inbound inquiries. Look for titles on their websites that sound like “business development” or “relationship manager”.
2. Angel Investor 2. Angel InvestorMost angel networks have a website that will tell you how to contact their members or the broader organization. One option is to apply for funding through a general submission form, the other is to identify higher ranking members of the network and reach out to them directly via email or LinkedIn.
3. Venture Capita 3. Venture CapitalVCs tend to have fairly aggressive investment sourcing processes, so they should be relatively easy to get a hold of if you have a promising business. Like banks, many VCs have professionals solely focused on deal origination, so those professionals may be a good starting point. Shoot them an email and see what you hear back. However, make sure the firm’s sector focus areas align with what your business does to improve your response hit rate and reduce any wasted time. If that doesn’t work, review their team’s bios to see whose entrepreneurial experiences may align with yours – if they deem you to be a kindred spirit, that should yield a response.
4. Growth Equity 4. Growth EquityMany growth equity investors have dedicated deal sourcing teams, so this is a good place to start. Scan through the bios and look for language that references “sourcing” or “business development”. If not, start at the top of the org chart and work your way down until you get a response. Persistence should pay off even if it takes a few followup attempts.
5. Private Equity 5. Private EquitySame as growth equity & VCs, it’s common for PE funds to have dedicated deal sourcing professionals. Insofar as it’s these individuals’ jobs to identify new investment opportunities, they will be happy to hear from you. Look for titles with the words “Investment Development”, “Business Development”, “Deal Sourcing”, or “Origination” in them. As with other professional investment firms, make sure their investment criteria aligns with your business in terms of industry and the amount of EBITDA you are generating.
6. Family Office 6. Family OfficeGood luck. There’s a saying, “If you’ve met one family office, you’ve met one family office.” All that means is that “family office” can mean a lot of different things and getting through to the decision maker can be a real challenge. To improve your odds, look for family offices that advertise investment activity of the variety that your business presents. In other words, if a family office has made all of their money in real estate and seems to focus within that asset class, it may not be worth approaching them about your manufacturing business. Your best bet is to start at the top and work your way down. If you can’t get a response from the head of the office, many of these groups have a Chief Investment Officer or CFO that may be a good starting point.
7. Search Fund 7. Search FundThe good news about search funds is that they are run by 1-2 people whose sole purpose is to find a business to buy, so they will be highly motivated to respond to your call email. Of every investor type profiled here, a search fund will be relatively more likely to respond to a cold call or email. Plus, they spend most of their time sending out emails and letters to prospective targets, so someone seeking to have a conversation about a deal will be most welcomed.
8. Independent Sponsor 8. Independent SponsorSimilar to search funds, independent sponsors spend most of their time hunting for new investment opportunities. In the rare instance that a business owner actually calls them, they will be highly likely to return the call. Your best bet is to reach out to the founder directly. Just make sure to probe on their network of capital sources because they won’t directly control the capital needed to close on a transaction with you.

Conclusion

I realize that was a lot of information, but hopefully you’re now armed with knowledge about the type of investor your need, how to build a list of contacts and best practices in reaching out to each type of investor directly. As always, we’re here to help, so please reach out to start a conversation.

About ClearLight Partners

ClearLight is a private equity firm headquartered in Southern California that invests in established, profitable middle-market companies in a range of industry sectors. Investment candidates are typically generating between $4-15 million of EBITDA (or, Operating Profit) and are operating in industries with strong growth prospects. Since inception, ClearLight has raised $900 million in capital across three funds from a single limited partner. The ClearLight team has extensive operating and financial experience and a history of successfully partnering with owners and management teams to drive growth and create value. For more information, visit www.clearlightpartners.com.

Disclaimer: The views and opinions expressed in this blog are solely my own and do not necessarily reflect any ClearLight opinion, position, or policy.

Private Equity vs. Venture Capital: Similar but Mostly Different

Read time: 3-4 Minutes

“The beginning of wisdom is the definition of terms” (Socrates)

Introduction & Definitions of Private Equity and Venture Capital

At 60+ years since the birth of the Private Equity (PE) and Venture Capital (VC) industries, it’s easy to marvel at what they’ve become from their humble beginnings in the 1950’s.  While both sectors are now fairly mature, it remains surprisingly commonplace for business owners to use the terms PE and VC interchangeably.  Yes, in concept, both are vehicles for capital to flow into private companies with the expectation of returns that beat the public markets, but the differences between these asset classes far outnumber the similarities.  So, it seemed time to lay out the primary differentiating factors to eliminate any confusion.

Per Socrates’ advice above, let’s start by providing some basic definitions of PE and VC:

  • Private Equity. At its core, private equity is investing into (typically) established private companies to help them grow.  To do this, private equity fund managers, or General Partners, will raise capital from Limited Partners that often consist of pension funds, endowments, high net worth individuals or other entities seeking to invest through this asset class.  Using this capital, PE funds will source investment opportunities relevant to their investment criteria, negotiate transactions, and work with their acquired companies to improve profitability over what usually amounts to a 3-5 year (or more) investment period. 
  •  Venture Capital.  Similar to PE funds, venture capital firms also invest as General Partners on behalf of institutions and other accredited investors.  However, they generally focus on emerging companies or technologies that are earlier in their lifecycle and show greater upside potential (described further below).

The Key Differences Between Private Equity and Venture Capital

Based on the definitions above, PE and VC may seem relatively similar at this point, but a closer look will reveal some important distinctions.  So, without further ado, here are the main differences between PE and VC.  Just remember that the guide below will apply in most cases, but there are exceptions to every rule:

  1. Stage of company in which they invest. Perhaps the most universally applicable differentiator between VC and PE funds is the stage of company in which they invest.  “Stage” can mean a lot of things but can generally be defined in terms of (i) length of time in operation and (ii) EBITDA – you either have it, or you don’t. 
  1. Not to oversimplify things, but if your business falls somewhere between start-up and 5 years in operation, you are most likely a better target for venture capital.  Said another way, if you are still raising capital in “rounds”, then you are squarely a target for the VC community.  Further, if your company is producing revenue and growing quickly, yet you are not generating positive EBITDA because you have been investing heavily to support your growth and acquire new customers, then you are also a better fit for a VC fund.  Of course, the inverse of these examples is true in that more time in operation and more profitability generally makes you a more relevant candidate for PE.  See the table below to summarize these points:
  1. How they approach valuing your company. A common PE methodology to valuing a business is to simply apply a multiple to last twelve months (or, “LTM”) EBITDA to arrive at an Enterprise Value.  However, as noted above, not all businesses are generating EBITDA, so VC investors have developed methodologies to ascribe value to other metrics that can be indicative of a company’s worth.  For instance, for fast growing companies that have revenue but no profits, one way to arrive at a valuation is to apply a multiple of revenue.  This approach has become commonplace in sectors like the software industry (case in point, if you want to make a SaaS entrepreneur give you a funny look, then start talking about EBITDA multiples).  It’s a strange paradox that, as the owner of a high growth business, it can be advantageous to not have EBITDA, because as soon as you generate profits investors will change their thinking from revenue multiples to EBITDA multiples.  The exercise is even further complicated when a business is pre-revenue – I’ve spoken with one VC who humorously suggests that in this case you apply a “multiple of dreams”.  The table below outlines this basic idea:
  1. Amount of capital invested per deal / number of investments made. While the total amount of capital under management between a PE and VC firm may be similar, it’s often the case that the amount invested per deal is higher for PE firms than VC firms.  As a result, a PE firm will typically have a more concentrated portfolio of companies, say 10 or fewer investments in a given fund, as compared to a VC that may have 20-40 (or more) per fund.  The chart below provides an illustrative visual example of this dynamic.  
  1. Ownership position taken. In short, PE funds usually need control and VC funds don’t.  For a PE fund, though, control doesn’t always mean 100% ownership.  This is a common misconception.  For example, many private equity funds insist that a company’s existing shareholders retain equity alongside them (or, “rollover”) such that the executive team has “skin in the game” as well.  But, why do PE funds prefer control in the first place?  There are various reasons for this, but an important one is that many successful PE funds have a proven track record of adding value to their portfolio companies by actively helping to guide strategy.  All things equal, it’s much easier to influence an investment if you are the final decision maker – if you are a business owner reading this, you can appreciate the concept.  PE funds also seek control given that they are typically writing relatively large checks into each deal as a percentage of their total fund size, and one way to offset the risk of such exposure is to have more say regarding how a business is managed (though most funds would freely admit that they would prefer to leave day-to-day management to their executive teams).  Note also that in a private equity deal the number of investors is usually limited to the PE fund, a small group of prior controlling shareholders and the company’s management team.   
  1. Conversely, VC funds are more comfortable with non-control, or “minority” investments because they are making far more bets than a PE fund (i.e. less of their fund is at risk per investment) and are not often set up for the requisite oversight of such a large portfolio of companies.  Further, VCs are inclined to let a visionary founder retain control and continue to rapidly grow his/her business in advance of an IPO or sale once they’ve achieved critical mass.  At this stage of investing, it’s important that the founder remains highly motivated with the accompanying entrepreneurial freedoms necessary to continue their growth trajectory.  Finally, another departure from PE is that the ownership group in a VC-backed company will often include additional parties such as other VC funds, angel investors and early employees who knowingly traded lower compensation for equity upside.   
  1. Here’s a chart that will help you think about the composition of shareholders in PE- and VC-funded deals:
  1. How they’ll seek to exit their investments. Once a PE fund has increased profitability to a point where an exit will likely produce an acceptable return, they will explore a sale to return capital to their investors. Today, private equity funds are exiting to two primary categories of buyers: (i) other private equity funds, and (ii) strategic buyers (i.e. larger corporate entities in the same or similar industry as the target company).  While IPOs are a possibility if a PE firm’s portfolio companies achieve a suitable size, a sale to another PE fund or strategic buyer is often a more familiar path, results in fewer transactional intricacies and allows for a more complete exit.
  1. While VC funds have the same exit options as PE funds in the form of sales to PE funds and strategic buyers (and frequently utilize them), they are relatively more inclined to tap the public markets for exits via an IPO.  VCs have historically gravitated to IPOs due to the ability to achieve premium valuations relative to other exit alternatives and their effectiveness in raising a large amount of capital at one time.  IPOs also offer an ancillary, marketing-related benefit of raising awareness of the target company in connection with its public offering.     
  1. In case you’re interested, here’s a chart that shows the “Top 25 VC-Backed Exits of All Time”.  Are you familiar with the term “Unicorn”?  In a business context, it refers to any VC-backed company that achieves a $1BN or more valuation.  So, consider these success stories best in breed:
  1. Returns expectations. This is an area where we see a big divide in how PE and VC firms approach investing.  PE funds are generally targeting a 2-3x return on each deal whereas VC investors have grown to accept that a mere 20% of their investments will produce 80% of their targeted returns.  In other words, VCs know that many of their investments will not return anything, though a select few will be huge homeruns, on the order of 10, 50 or even 100x+ returns.  Interestingly, though, that while the respective loss tolerances and upside potential for both strategies may differ, the expectations for a minimally acceptable return for the fund as a whole are not that far apart.  Here’s a chart that puts this in perspective:
  1. Team backgrounds. Given the difference in the stage at which PE and VC firms get involved with their companies, the approach to staffing these firms can be different as well.  For instance, it’s common for VC fund investment professionals to have significant entrepreneurial and operating experience with tech-related businesses.  This experience can be important to position themselves as value-added investors and in their ability to relate to the founders of companies in which they are investing. 
  1. In private equity funds, professionals will often come from the ranks of management consulting and/or investment banks, though certain PE firms do have a more operationally focused orientation which can result in them attracting talent with operating experience as well.  For private equity funds, having investors with an operating background can result in more empathetic interactions with the executives running their portfolio companies and the ability to add value beyond financial engineering.  Regardless of background, any investor with whom you’ll be working will be highly focused on helping you increase the value of your business.

Summary

I realize I just threw a lot at you, so here’s a side-by-side comparison of they key differences between PE and VC.  Please get in touch if you’d like to discuss anything in this piece further, and consider us a resource to you and your business.

About ClearLight Partners

ClearLight is a private equity firm headquartered in Southern California that invests in established, profitable middle-market companies in a range of industry sectors. Investment candidates are typically generating between $4-15 million of EBITDA (or, Operating Profit) and are operating in industries with strong growth prospects.  Since inception, ClearLight has raised $900 million in capital across three funds from a single limited partner. The ClearLight team has extensive operating and financial experience and a history of successfully partnering with owners and management teams to drive growth and create value.  For more information, visit www.clearlightpartners.com.

Disclaimer: The views and opinions expressed in this blog are solely my own and do not necessarily reflect any ClearLight opinion, position, or policy.

Don’t Stay Past Midnight – Reflections on Knowing When to Sell Your Business (Part 6)

If you’ve been with us for the preceding weeks, you know that we’ve been walking through a list of six ways to objectively determine if it might be a good time to consider the sale of your private business.  Last week’s blog addressed the concept of making sure there is enough future value remaining in the business to attract investors.  In short, if you wouldn’t invest in your company today, then why would someone else?

This week, we’re going to explore the 6th and final point below which suggests that if your competitors are deciding to sell, then they have likely thoughtfully considered one or more of the items on our list and concluded that the timing was right.

  1. Valuations are Historically High
  2. You’ve Experienced Multi-Year Growth in Revenue and Profits
  3. Expected Proceeds from an Exit Exceed Your Previously Defined Goals (i.e. You’ll Hit Your “Number”)
  4. The Industry is Experiencing Tailwinds from Positive Trends
  5. Value Remains for the Next Buyer
  6. You See Your Competitors Deciding to Sell

Remember when your mom said, “If your friends jumped off of a cliff, then would you do it too?”  Well, maybe you would if the cliff was a metaphor for selling your business and valuations in your industry were historically high, you’d experienced consistent growth in Revenue and Profits, a sale would allow you to live in a manner consistent with your goals, your industry was benefitting from an upswing, and the business would make for a good investment by an investor’s standards.  Here are some more reflections on the topic:

  • You See Your Competitors Deciding to Sell. If you assume that (i) an entrepreneur’s business is their most valuable financial asset and (ii) that they are not likely to part ways with it unless one or more compelling factors drove them to the conclusion to sell, then news of a competitor deciding to exit should result in some real introspection on your own exit timing.  And, an ancillary benefit of a competitor proceeding with a transaction is that you can often triangulate around the purchase multiple once the gossip mill starts humming about the deal.  It goes without saying that just because your peers in the industry decide to sell, it doesn’t mean that you have to.  Perhaps you have a higher risk tolerance than they do and your patience will pay off.  Just recognize that forces could be at work that are creating a good window for an exit.

Well, this completes our blog series, and we hope you’ve benefitted from some of these perspectives.  As always, we’re interested in your feedback.  To start a conversation, please reach out to Joe Schmidt (jjs@clearlightpartners.com) or Mark Gartner (mpg@clearlightpartners.com).  We want to hear from you!

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About ClearLight Partners

ClearLight is a private equity firm headquartered in Southern California that invests in established, profitable middle-market companies in a range of industry sectors. Investment candidates are typically generating between $4-15 million of EBITDA (or, Operating Profit) and are operating in industries with strong growth prospects.  Since inception, ClearLight has raised $900 million in capital across three funds from a single limited partner. The ClearLight team has extensive operating and financial experience and a history of successfully partnering with owners and management teams to drive growth and create value.  For more information, visit www.clearlightpartners.com.

Disclaimer: The views and opinions expressed in this blog are solely my own and do not necessarily reflect any ClearLight opinion, position, or policy.

Don’t Stay Past Midnight – Reflections on Knowing When to Sell Your Business (Part 5)

If you’ve been with us for one of the preceding weeks, you know that we’ve been walking through a list of six ways to objectively determine if it might be a good time to consider the sale of your private business.  Our prior blog highlighted why investors respond well to an industry that is benefitting from positive trends that are likely to continue for the foreseeable future.  In short, good industries often support good investments, and if your business is operating in a sector with tailwinds at its back, this could be another factor contributing to a decision to explore an exit. 

This week, we’re going to explore #5 below which is a good reminder that in order to drive a good exit, buyers have to believe that your business has strong growth prospects for the foreseeable future.  This is important because whoever buys your business has to also believe that they will be able to sell the growth story to another investor down the road. 

  1. Valuations are Historically High
  2. You’ve Experienced Multi-Year Growth in Revenue and Profits
  3. Expected Proceeds from an Exit Exceed Your Previously Defined Goals (i.e. You’ll Hit Your “Number”)
  4. The Industry is Experiencing Tailwinds from Positive Trends
  5. Value Remains for the Next Buyer
  6. You See Your Competitors Deciding to Sell

Think of it this way, nobody would purchase a lemon with all of the juice squeezed out of it, right?  Perhaps a lemon is not the best example here, but you get the point.  Here are some more reflections on the topic:

  • Value Remains for the Next Buyer. Sometimes, an owner’s decision to exit is driven by the threat of looming headwinds to the business or industry.  Conceptually, getting out before these challenges arrive makes sense, but it’s likely that investors are already, or will be, attuned to those same issues, and it may then be too late to drive an optimal outcome from a sale.  At a minimum, investors are going to need to know that the prospects for growth will remain strong for the next 5-10 years.  Otherwise, they may encounter challenges when they ultimately seek an exit.  Said another way, if you are considering an exit, reflect on whether you would want to invest in your business today
  • To drive home the point visually, take a look at the following chart that illustrates how an investor may assess the relative attractiveness of your business based on the expected growth in profitability over time.  The punchline is that your prospects for an exit are substantially improved if investors see a sustainably bright future for the company.

Stay tuned for our final blog where we’re going to address point #6 above, You See Your Competitors Deciding to Sell.  As always, we’re interested in your feedback.  To start a conversation, please reach out to Joe Schmidt (jjs@clearlightpartners.com) or Mark Gartner (mpg@clearlightpartners.com).

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About ClearLight Partners

ClearLight is a private equity firm headquartered in Southern California that invests in established, profitable middle-market companies in a range of industry sectors. Investment candidates are typically generating between $4-15 million of EBITDA (or, Operating Profit) and are operating in industries with strong growth prospects.  Since inception, ClearLight has raised $900 million in capital across three funds from a single limited partner. The ClearLight team has extensive operating and financial experience and a history of successfully partnering with owners and management teams to drive growth and create value.  For more information, visit www.clearlightpartners.com.

Disclaimer: The views and opinions expressed in this blog are solely my own and do not necessarily reflect any ClearLight opinion, position, or policy.

The Art of the Humblebrag

Read time: 2-3 minutes

“A fool tells you what he will do; a boaster what he has done.  The wiseman does it and says nothing.” (unknown)

Remember when bragging used to be considered a bad thing? It actually wasn’t that long ago, but it seems like a distant memory.  Imagine what our favorite social networking sites would be like if you stripped away the shameless self-promotion – you’d start seeing the digital equivalent of tumbleweeds ambling across an otherwise quiet Feed.

Humblebragging is defined as, “Making a seemingly modest, self-critical, or casual statement or reference that is meant to draw attention to one’s admirable or impressive qualities or achievements”1.  Sound familiar?  For a few common examples, take a look at the following garden variety humblebrags:

  1. So humbled…So…honored…So grateful2. This is the most common tactic for sharing something that a person is proud of.  Note that the humility infused setup will always be immediately followed by news of the subject’s participation on a panel, receipt of recognition, giving of a speech, or contact with a celebrity relevant to their line of work. If you have been sucked into the Feed and encounter the words “humbled”, “honored”, “grateful”, or others of their ilk, then keep scrolling
  2. My life has been hard, but I’m crushing it. These posts are seemingly micro-sized motivational speeches but are actually boasts in sheep’s clothing.  They are a fabulous way to talk about the adversity a person has historically encountered but how they presently have the American Dream in a headlock.  Look for shots of a person on a boat, reclining on a private jet or otherwise flaunting the trappings of success.  As a general rule, treat these posts like you would fluorescent coloring on a frog in the Amazon, and give their owners a wide berth.
  3. [Insert Name] did a great job…and so did I. This is the more Machiavellian derivative of example #1 that uses the misdirection of applauding someone else while making sure to peek your head into the frame.  Example: humblebragger participates in a noteworthy event hosted or moderated by someone else.  Humblebragger then compliments said host on their performance while displaying a picture that includes both the humblebragger and the target of their self-interested praise.  While a clever adaptation of the humblebragging genre, it’s ultimately as transparent.

The problem with all of this false modesty is that it’s been proven to make people dislike you.  A 2018 study from researchers at Harvard and the University of North Carolina Chapel Hill suggests that humblebragging actually makes people like you less than if you were to employ good old-fashioned self-promotion.  One of the study’s authors, Ovul Sezer, suggests, “You think, as the humblebragger, that it’s the best of both worlds, but what we show is that sincerity is actually the key ingredient.”

To be clear, I’m not calling for an elimination of all promotion – that would essentially destroy the marketing industry, and well-executed advertising can be important to getting what you want, personally and professionally.  Rather, I propose that we evolve to what I’ll call “Self-Promotion 2.0”.  In other words, eliminate the sleight of hand and embrace sincerity.  Here are some ideas:

  1. Mention what you did, hold the humility. If you feel compelled to share an accomplishment with the cybercommunity, then simply share it without the sneakily self-effacing lead in.  Per the study referenced above, people may still find the self-promotion annoying, but it will be relatively less annoying than the equivalent paired with a side of humblebragging.
  2. Offer something of value. One of my favorite features of LinkedIn, before it got all humblebraggy, was the articles that people would share.  The Feed was essentially a curated collection of the best business thought pieces across an array of topics, and I loved the daily exercise of leveling up my thinking in relevant areas.  The beauty of article (or video) sharing is that if you consistently distribute high value information relevant to your industry, you become associated with thought leadership in your field.  Let’s bring that back to the forefront.  On the flipside, one positive trend I’ve noticed is a lot of people are starting to publish more original content on the platform which is a great way to stay current on my friends’ and colleagues’ long-form perspectives on issues resonating with them.  Keep up the good work!
  3. Advertise future events. While a fairly utilitarian application of social networks, this is a practical way to get the word out about upcoming events that those in your network may want to attend.  What’s refreshing about these posts is that the objective is in plain sight and not obfuscated by feigned meekness.
  4. Promote someone else without agenda. If you observe someone do a kudos-worthy job of something, a wonderful way to acknowledge them is through social media.  Just make sure you aren’t trying to grab some of the reflected glow for your own benefit.  This one doesn’t even fall into the self-promotion category, this is just encouragement for the sake of making someone else feel good.

Man, it feels good to get that one off my chest.  Interested in any reactions or comments, fire away with feedback.

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1Merriam-Webster

2I’m embarrassed to admit that a younger me has deployed versions of the “So humbled…” post in an early attempt to get involved in the self-promotion game.  I feel about that like I do about parting my hair down the middle in the 7th grade – it seemed like a good idea at the time, but I now regret it.  And, no, this footnote is not some meta attempt to reference the existence of my own humblebrag-worthy accomplishments by citing the fact that I’ve humblebragged in the past.

About ClearLight Partners

ClearLight is a private equity firm headquartered in Southern California that invests in established, profitable middle-market companies in a range of industry sectors. Investment candidates are typically generating between $4-15 million of EBITDA (or, Operating Profit) and are operating in industries with strong growth prospects.  Since inception, ClearLight has raised $900 million in capital across three funds from a single limited partner. The ClearLight team has extensive operating and financial experience and a history of successfully partnering with owners and management teams to drive growth and create value.  For more information, visit www.clearlightpartners.com.

Disclaimer: The views and opinions expressed in this blog are solely my own and do not necessarily reflect any ClearLight opinion, position, or policy.

Don’t Stay Past Midnight – Reflections on Knowing When to Sell Your Business (Part 4)

If you’ve been with us for one or more of the prior weeks, you know that we’ve been walking through a list of six ways to objectively determine if it might be a good time to consider the sale of your private business.  Last week’s blog touched on the exercise of comparing the expected after-tax proceeds from a sale to your “Number” (i.e. the amount you need to achieve from a sale to meet your vision for life post transaction).  In summary, if a sale allows you to clear your pre-defined goal, then you may have yet another objective input to your decision to consider an exit.

This week, we’re going to explore #4 below which takes the analysis up a level and examines the state of the industry in which you’re operating:

  1. Valuations are Historically High
  2. You’ve Experienced Multi-Year Growth in Revenue and Profits
  3. Expected Proceeds from an Exit Exceed Your Previously Defined Goals (i.e. You’ll Hit Your “Number”)
  4. The Industry is Experiencing Tailwinds from Positive Trends
  5. Value Remains for the Next Buyer
  6. You See Your Competitors Deciding to Sell

If there’s one thing we’ve learned from investing in private companies for nearly 20 years, it’s that getting the industry right is a powerful force in driving good investment outcomes.  Not to oversimplify things, but Good Industry + Good CEO has proven to be more than half the battle in most cases. So, we pay close attention to the industry in which a company is operating if we are considering making an investment.  Here are some more detailed reflections on how to think about the state of your industry:

  • The Industry is Experiencing Tailwinds from Positive Trends. As a private equity investor we like growth, but we don’t necessarily look for rapid growth in an industry to compel the pursuit of a deal.  In fact, if we see graphs with industry growth rates that are too steep, we may often conclude that the sector is better suited for a VC investor who has the stomach for the valuations that accompany such growth.
  • In general, we want to invest in companies whose industry growth is comfortably beating GDP for tangible reasons, and we’ve historically pursued businesses operating in sectors with 5-15% expected annual growth for the foreseeable future.  Ideally, this growth is being propelled by factors that are easy to understand, concrete and sustainable.  Said another way, if you can explain why your industry is growing to a family member with no prior familiarity of it, then that is a good starting point.  Further, all industries go through cycles, so if you are currently on an upswing and can explain in simple terms why favorable trends are likely to persist, then this should resonate with investors.
  • Here’s a simple example to illustrate how an investor might evaluate the relative attractiveness of your business based on the growth of the industry in which you’re operating:

Stay tuned for the next blog where we’re going to address point #5 above, Value Remains for the Next Buyer.  As always, we’re interested in your feedback.  To start a conversation, please reach out to Joe Schmidt (jjs@clearlightpartners.com) or Mark Gartner (mpg@clearlightpartners.com).

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About ClearLight Partners

ClearLight is a private equity firm headquartered in Southern California that invests in established, profitable middle-market companies in a range of industry sectors. Investment candidates are typically generating between $4-15 million of EBITDA (or, Operating Profit) and are operating in industries with strong growth prospects.  Since inception, ClearLight has raised $900 million in capital across three funds from a single limited partner. The ClearLight team has extensive operating and financial experience and a history of successfully partnering with owners and management teams to drive growth and create value.  For more information, visit www.clearlightpartners.com.

Disclaimer: The views and opinions expressed in this blog are solely my own and do not necessarily reflect any ClearLight opinion, position, or policy.

Don’t Stay Past Midnight – Reflections on Knowing When to Sell Your Business (Part 3)

Welcome back to our blog series that tells you, a business owner, how we, a private equity fund, determine the proper timing to consider an exit.  Having been investing in private companies for nearly 20 years, this is a question with which we have had to contend many times.  As a result, we respect that it can be challenging and stressful, but if you strip away the emotion surrounding the exercise, you’re left with common sense indicators that can help you make an objective decision about when to sell.  These indicators are presented in the list below.

We’ve previously explored points #1 and #2.  This week, you guessed it, we’re going to touch on point #3 in more detail:

  1. Valuations are Historically High
  2. You’ve Experienced Multi-Year Growth in Revenue and Profits
  3. Expected Proceeds from an Exit Exceed Your Previously Defined Goals (i.e. You’ll Hit Your “Number”)
  4. The Industry is Experiencing Tailwinds from Positive Trends
  5. Value Remains for the Next Buyer
  6. You See Your Competitors Deciding to Sell

We could have also probably titled this one, “Pigs Get Fat, Hogs Get Slaughtered” but decided to go with a softer delivery.  Take a look at how we think about this point:

  • Expected Proceeds from an Exit Exceed Your Previously Defined Goals. Most professional investors have a pre-defined notion of what “good” looks like from a returns perspective. Classically, in the private equity business a good outcome is doubling or tripling your money in around 5 years.  Private equity funds might also describe success in terms of IRR %.  Therefore, when considering an exit, if a private equity firm has reason to believe that a sale will generate returns that exceed its pre-defined thresholds, then this becomes a fairly black and white input that helps inform the exit decision.  The benefit of defining these metrics ahead of time is that it wards off the judgement clouding effects of fear, irrational optimism, and/or whatever your gut is telling you that day.
  • However, returns metrics are likely not how you as a business owner are looking at the world.  We’ve found that many entrepreneurs have a round number (after tax) in mind that they want to hit in order to have a post-transaction existence that fulfills their visions for the next phase of life.  This number might contemplate future travel, real estate purchases, boats, starting a new business and/or allocation of the sale proceeds to family members.  So, using the information available to you regarding valuation multiples, you should have a pretty good idea of whether a sale will allow you to hit your number.  If it does, then considering an exit might be a good idea.

  • Here’s a simple example to drive home the point:

Stay tuned for next week’s blog where we’re going to address point #4 above, The Industry is Experiencing Tailwinds from Positive Trends.  As always, we’re interested in your feedback.  To start a conversation, please reach out to Joe Schmidt (jjs@clearlightpartners.com) or Mark Gartner (mpg@clearlightpartners.com).

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About ClearLight Partners

ClearLight is a private equity firm headquartered in Southern California that invests in established, profitable middle-market companies in a range of industry sectors. Investment candidates are typically generating between $4-15 million of EBITDA (or, Operating Profit) and are operating in industries with strong growth prospects.  Since inception, ClearLight has raised $900 million in capital across three funds from a single limited partner. The ClearLight team has extensive operating and financial experience and a history of successfully partnering with owners and management teams to drive growth and create value.  For more information, visit www.clearlightpartners.com.

Disclaimer: The views and opinions expressed in this blog are solely my own and do not necessarily reflect any ClearLight opinion, position, or policy.

How to Create Deal Sourcing Alpha

Read time: 3 Minutes

“It is impossible to produce superior performance unless you do something different.”

(John Templeton)

In an investing context, “alpha” is a term used to describe a strategy’s ability to beat the market.  Simplistically, it could also be thought of as excess return.  Therefore, alpha from a deal sourcing perspective would be generating investment opportunities that your competition is not also seeing.  In the current state of the private equity game, alpha generation in deal sourcing is essential given elevated competition for the precious few higher quality opportunities in the market. 

While the deal sourcing role within private equity funds has evolved and grown more professionalized over time, there continues to exist several flavors of staffing and strategy.  However, one thing is clear – the “order taker” model of reactively waiting for widely-shopped deals to find you simply because you have a fund will not survive over the long term.  How then is a fund to produce leads that their peers are not also seeing?  Here are some ideas for strategic consideration – figuring out the tactics is up to you. 

  1. Develop a thesis. Sometimes this is easier said than done.  The bottleneck with this approach is having the good idea to begin with, but deal sourcing professionals observe every deal that comes in the door and should be able to recognize patterns that point to good investment ideas.  Once a sector has been chosen, the disciplined exploration and documentation of an industry’s trends, risks, opportunities, competitors, etc. will yield well-organized knowledge that can be used to approach targets and relevant referral sources proactively.  Further, an ancillary benefit to developing a thesis is being able to respond quickly and with conviction to deals from that industry that come in through traditional auction processes.  Everyone is looking for an angle in auctions – having a well-vetted thesis in the can is one of them. 
  1. Cultivate deep relationships with proven executives from sectors you like. Many executives have enjoyed long-tenured careers within sectors relevant to your investing efforts and have the respect and contacts to show for it.  Off-market deals tend to find their way to these industry luminaries, often before a business goes to a full auction.  These individuals will give your firm added credibility in speaking with business owners and often add significant value post-closing.  Therefore, you need to have an engine that identifies such individuals and nurtures ongoing relationships with them.
  1. Get smarter about marketing. Most firms are still trying to figure out what marketing means for a private equity fund.  However, leaders on the marketing front have emerged and have resources behind an array of channels including email campaigns, print publications, social media, and participation in various in-person events as moderators, panelists, etc.  The challenging part is getting ahold of the right metrics to quantitatively assess ROI, and the exercise is often muddled by the understanding that one deal can justify a year’s worth of marketing spend.  You may have heard John Wanamaker’s famous quote, “Half the money I spend on advertising is wasted; the trouble is I don’t know which half.”  Sophistication in private equity marketing means consistently driving down wasted advertising spend and not narcissistically gazing into the reflecting pool of vanity metrics at the top of the funnel.  It means generating differentiated, actionable leads that turn into indications of interest.
  1. Purposeful, proactive interactions with intermediaries. Intermediary coverage has gotten harder, largely due to the proliferation of newer, inexperienced sourcing professionals that annoy busy investment bankers with meaningless check in calls.  The good news is that you can do it better, and if you do it right, you’ll unearth hidden opportunities. This happens because by expressing proactive interest in specific sectors, you’ll trigger connections in the mind of intermediaries who can help with introductions to executives and/or businesses that are perhaps too small for a formal process.  It also gives you something interesting to talk about besides the weather in their particular city and positions you as a source of value-added information.         
  1. Go local. All things being equal, a fund should have a relative advantage over their competition in pursuing local deals.  Perhaps this is because dealing with local parties feels inherently more familiar and mollifies certain anxieties surrounding deal discussions.  Also, in most cities, the number of eligible lower middle market companies vastly outnumbers the list of private equity funds, so this creates a motivation to embrace and build a relationship with the local business community. In Orange County, for instance, there are around three million people and only a small handful of dedicated funds.  The numbers are likely in your favor.

As always, I’m interested in your reactions and comments.  Fire away with feedback about anything I’ve missed or your experiences with these strategies. 

About ClearLight Partners

ClearLight is a private equity firm headquartered in Southern California that invests in established, profitable middle-market companies in a range of industry sectors. Investment candidates are typically generating between $4-15 million of EBITDA (or, Operating Profit) and are operating in industries with strong growth prospects. Since inception, ClearLight has raised $900 million in capital across three funds from a single limited partner. The ClearLight team has extensive operating and financial experience and a history of successfully partnering with owners and management teams to drive growth and create value. For more information, visit www.clearlightpartners.com.

Disclaimer: The views and opinions expressed in this blog are solely my own and do not necessarily reflect any ClearLight opinion, position, or policy.