Private equity and early stage investing are travelling better since the GFC.
Couple of reasons, amongst others …
- Valuations in non-internet businesses have come down considerably post GFC. When the market is buoyant valuations based on owners expectations tend to have more hype in them. With investors being more discerning the downturn has made it more attractive to early stage investors.
- Opportunities presented for investment tend to be more serious. Entrepreneurs are usually more committed to their businesses and they are in for the long haul.
This means that the quality of the companies presented for private equity investment is far higher and the transaction is fairer to all parties.
If a private equity investor has say $200,000 to invest if the pre-money valuation is $1 million then they may end up with around 20%. However same company, same entrepreneur in buoyant times with $200k may find that the valuation the entrepreneur presents is $2.5 million. This time the money only buys around 8%.
For the second part, a previous blog post said it all. Serious opportunities are where there is great opportunity and the entrepreneur has the capability to implement it.
Capability to investors is evidenced by:
- Experienced management team with deep industry experience.
- Available channels to market.
- Good strategic partnerships.
- Proven high growth experience.
- Availability of critical human resources.
- Can implement the goals in the “Use of Investor Funds” statement in their stride.
Innovation to investors is evidenced by:
- Satisfies a compelling (global) need.
- Targets a well defined (large) niche market.
- Has significant competitive advantage which is sustainable over the medium term.
- Supports high gross margins.
- Enables high scalability.