I receive emails from venture capitalists and private equity constantly. Mostly I see them as annoying spam, but the reality is that this is a predatory industry that does more harm to American GDP than even payday loan sharks or the cigarette companies. Sometimes I reply to troll a little bit. I am sharing this conversation below to demonstrate why all successful founders should steer clear of them.
Venture capitalist (names changed to protect the guilty):
I’m reaching out to you at the request of my client, PRIVATE EQUITY. PRIVATE EQUITYis a private equity firm with $XXX million in committed capital and a history of partnering with founders to grow their businesses. Since its 201X founding, PRIVATE EQUITY has acquired XX platform companies and XX add-ons, partnering with founders in every case.
Why Coalition Technologies?
Through its extensive history with a wide variety of marketing services companies, PRIVATE EQUITY has developed a strategic interest in building a market leading position in offering digital marketing services to small and medium businesses. Based on analysis conducted jointly by PRIVATE EQUITY and my firm, PRIVATE EQUITY , we believe Coalition Technologies, LLC is one of just a few companies that is well-positioned to become a leader of this sector.
How would a partnership with PRIVATE EQUITY Capital benefit Coalition Technologies?
While every opportunity is unique, some likely benefits of partnership are:
Capital. By making an initial control investment, PRIVATE EQUITY would provide founders and current ownership some liquidity and financial diversification. Furthermore, PRIVATE EQUITY would seek to deploy additional funds in the business for both organic growth and acquisitions.
Experience navigating the next stages of growth. PRIVATE EQUITY has “been-there-done-that” experience advancing lower middle-market companies into industry leaders through a buy-and-build value creation strategy.
Strategic and operating insight. While PRIVATE EQUITY does not participate in the day-to-day operations of its portfolio companies, they do take a servant leadership approach to assisting management in achieving the shared vision.
What is our request?
I’d like to introduce you to the PRIVATE EQUITY team directly in a mutually exploratory conference call. If you share PRIVATE EQUITY growth aspirations, then it should definitely be worth an hour of your time to investigate whether they are the right partners to help you go further and faster together than you can independently.
To facilitate this introduction, I’d like to schedule a preliminary phone conversation with you. (Feel free to book a time directly on my calendar, or send me some suggestions of convenient times.)
I’m looking forward to sharing more details about this opportunity with you.
My response was a bit of a troll asking for more information.
Venture capitalist reply:
Thanks for getting back to me.
We understand your situation as a founder and not wanting to lose control of the business. PRIVATE EQUITY is exclusively a ‘control investor’ meaning it would control the board and governance, but they are not operators and leave day-to-day control of the business in the hands of the founder. PRIVATE EQUITY has invested in over 30 founder-owned businesses in the past six years and is one of the only PE firms to appear on Inc.’s 50 best PE firms for founders in each year of its existence. PRIVATE EQUITY specifically looks for founder partners that want to reinvest meaningfully in the business and continue to operate it. We’re happy to remove you from the list, but if you ever arrive at a point in which you’re looking for the right partner to accelerate your business’s growth, then I can’t recommend a better partner to explore than PRIVATE EQUITY . Generally, for a high performing company that PRIVATE EQUITY partners with as a platform, it will pay between 10x and 12x trailing twelve month EBITDA.
I was a finance major in college and everything you mentioned falls in line with what I was taught there. I have come to very different conclusions since then though.
Venture capital and private equity remove control from the founders and give it to people who usually only have a casual acquaintance with that business, and often have never even been founders themselves. Founders who are successful thoroughly understand the companies they built, the customers they work for, and the industries they work. Financiers who take control of companies typically join a board meeting about that company once a quarter and take a few calls or emails in between… yet they override the decisions of founders and eventually replace them with hired gun CEOs. Hired gun CEOs have been proven to get significantly worse results running companies than founders do. The VC and PE process does enormous harm to our world.
Offering to pay 10-12x EBITDA is not investing, it is buying low and selling high. It is the equivalent of someone in the middle ages who borrowed a bunch of money from a wealthy patron and then sailed to buy tea or some other good for a low price and bring it home to sell it for a high price. If I wanted to sell my company, why would I go through a middleman that only pays 10-12x EBITDA when I know I can go to the public markets or to a strategic acquirer and get multiple times that?
I have no intention of selling my company as long as I am healthy, it is profitable, and has a team of people I love to work with. I try to invest my profits in other areas sometimes and have never found any stock or real estate or anything else that I believe in 1/10th as much as I believe in Coalition. Nor have I ever had an investment that comes even close to the returns and low risk that comes from my own company. I no longer believe in investing in companies not run by their founders… and I am in the process of finding ways to move my excess capital into businesses that I directly control rather than doing mindless (and very risky) investments with people I have never met through the stock market. I think the ethical & moral thing for a founder to do is to run their company as best as they can without selling as long as they can unless health compels them to do otherwise. No one else is better positioned to do so, and the founder owes their team and their customers great leadership.