For more than a decade now, the Fed, on the back of the Great Recession, has stimulated the US economy by printing unprecedented sums of money and pegging interest rates at zero. In turn, asset prices have increased as more dollars have chased a similar number of assets. And as bonds are yielding close to zero, investors are funneling more and more capital into riskier assets, including private companies, in search of higher returns.
The year 2021 eclipsed venture capital and private equity records, as both spaces nearly doubled their 2020 figures. Venture capitalists invested more than $300 billion in US startups, and PE saw an additional $2.5 trillion in US mergers and acquisitions. In short, it’s never been a better time to be an entrepreneur and raise capital.
Amid so many new drivers of deal activity, entrepreneurs have begun to consider the merits of bringing on partners/investors to strengthen their balance sheets and add value to their organizations. Yet some of them make a reflexive decision based primarily on price. Optimizing for price may be the right choice if you’re selling to exit a business, but if your plan is to build your company and continue investing in it, the quality of your partnerships warrants greater focus.
Jim Collins, in his book Good to Great, posits that “the most important decisions that business people make are … who decisions.” When it comes to choosing an investor, the “who” is always as important as the “what” or the “how much.” A higher price today cannot compensate for the brain damage you incur from working with a difficult partner. Conversely, a few percentage points cannot compare to missing out on someone who is more enjoyable to work with.
Any entrepreneur concerned with picking the right capital partner should adopt these three simple principles:
1. Assess fit.
Take a close look at both your business and your personal needs. Ask yourself, “Is this investor someone I would enjoy working closely with? Are we aligned in terms of my vision for my company and my personal values?” If you don’t have strong overlap with this person, you’re setting yourself up for significant pain.
2. Consider business needs versus investor experience and resources.
Do an investor’s experience and resources add enough value that you feel good about selling a portion of your business? Where this equation yields positive output, your dilution in equity is accretive, meaning the value created through the partnership is greater than your decrease in ownership. You may own a smaller portion of the pie, but a larger overall pie increases your ownership value. In other words, dollars matter more than percentages.
3. Do your homework
Capital partners devote considerable time and resources to examining you and your business before making an investment, so why wouldn’t you do your own diligence? Partnerships are every bit a marriage but can be even more difficult to get out of, so, before you commit, gather as many references as possible from your fellow entrepreneurs by asking:
- In what ways did they deliver on their promises to add value?
- How were they supportive in tough times?
- Did they consider the interests of all shareholders and stakeholders, as well as what was best for the business, versus being singularly focused on their interests?
The proof will be in the pudding, meaning the feedback you get from these reference calls should be consistent with the claims the investor has been making about the ways in which they can benefit your business.
While running Marucci Sports, I saw firsthand how references can make or break a partnership. We were an upstart wood-baseball-bat manufacturer trying to break through at Dick’s Sporting Goods, the largest sporting-goods retailer. We didn’t have much going for us financially, but we made great bats and had several MLB All-Stars swinging them, including Sean Casey, now a popular television broadcaster. Sean lived in the Pittsburgh area, where Dick’s is based, so we took him to meet the buyers. After they tried convincing him to join their company softball team, they asked him for his opinion of Marucci. Sean thought for a moment, before bursting out, “The proof is in the pudding!” As he unpacked why Marucci bats were superior, we realized nothing else we could have done would have had a greater impact than his glowing review.
No matter what type of business you’re building, following the aforementioned advice and thinking broadly will ensure that your partnerships center on alignment and accretive dilution. As long as investors and entrepreneurs alike continue to appreciate the “who” as much as the “what” or the “how much,” even in the best of times, we can ensure our continued success when challenges arise.