Private Equity Experience

Understanding the Private Equity Ecosystem: VC, Series Funding, and PE Firms

• Emily Sander • Season 1 • Episode 8

Share episode

In this informative episode of the Private Equity Experience podcast, hosts Emily Sander, Rory Liebhart, and Ed Barton break down the complex world of private equity, venture capital, and series funding. Learn the differences between VC and PE firms and how to navigate the ecosystem to secure funding for your startup. Discover the importance of assembling a strong team of advisors and resources, including investment banks, financial advisors, and startup accelerators like Y Combinator and Startup Grind. Get insights on preparing for private equity investment and learn about essential books like "On Ramp to Exit" that can help you on your journey. Tune in to this episode to gain a deeper understanding of the private equity landscape and take the first step towards securing funding for your business.


Timestamps:
00:00 Introduction and Acronyms Galore
00:52 Understanding Private Equity and Venture Capital
01:33 Differences in Investment Strategies
02:47 Success Rates and Baseball Analogies
05:23 Fund Structures and LP Investors
07:40 Venture Capital vs Private Equity: Key Differences
09:50 Series A, B, and C Explained
11:13 The Transition from VC to PE
13:54 Bootstrapping vs Seeking VC Funding
15:57 Optimism in Startups vs Financial Plays in PE
16:27 Different Perspectives in Early-Stage Companies
17:00 Final Thoughts on Investment Strategies
18:00 The Importance of Consistency in Performance
18:21 Understanding Private Equity Hit Rates
18:36 The Concept of Zombie Companies
19:20 Private Equity vs. Venture Capital Strategies
23:53 Navigating Board Seats and Ownership
30:47 Advice for Founders Seeking Investment

Who We Are

If we haven’t met before—Hi! We’re a team of professionals who’ve worked together at multiple companies, seen private equity from all sides, and are here to share what we’ve learned to help you succeed. Ed Barton brings decades of tax and financial strategy experience; Rory Liebhart is a finance and M&A pro with a track record of high-growth exits; and Emily Sander is a former Chief of Staff, multi-time author, podcast host, and founder of Next Level Coaching, helping leaders and organizations accelerate their growth.


Connect with Ed

Connect with Emily

Connect with Rory

emily-sander_1_12-17-2024_160525:

Are we ready to rock and roll? This is like full of acronyms. It's like,

squadcaster-jidf_1_12-17-2024_160524:

let's

emily-sander_1_12-17-2024_160525:

it's like the one, two, threes of VC and series ABC into PE firms. So here we go.

squadcaster-jidf_1_12-17-2024_160524:

Yeah,

emily-sander_1_12-17-2024_160525:

Strap in boys and girls.

ed-barton_1_12-17-2024_160524:

baby.

squadcaster-jidf_1_12-17-2024_160524:

Yeah,

emily-sander_1_12-17-2024_160525:

But I think it's a good thing to talk about. Cause like, When I go, Hey, you know, private equity experience, we're talking about the PE world and they're like, Oh, so like, like VC. And I'm like, kind of, sort of, it's mostly like VC comes beforehand generally, but how do we want to get people into this?

ed-barton_1_12-17-2024_160524:

maybe never comes at all.

squadcaster-jidf_1_12-17-2024_160524:

right.

emily-sander_1_12-17-2024_160525:

That's true too.

ed-barton_1_12-17-2024_160524:

shows up on the scene. Or PE never shows up on the scene. It's like, it's a, it's a whole ecosystem where some, some feed on the slower, weaker animals. some

emily-sander_1_12-17-2024_160525:

Are you the limpy gazelle or are you the?

ed-barton_1_12-17-2024_160524:

the fast

emily-sander_1_12-17-2024_160525:

Oh my god.

squadcaster-jidf_1_12-17-2024_160524:

Mm hmm.

emily-sander_1_12-17-2024_160525:

Okay.

squadcaster-jidf_1_12-17-2024_160524:

I

emily-sander_1_12-17-2024_160525:

Okay.

squadcaster-jidf_1_12-17-2024_160524:

some similarities, i. e. that people that invest in these companies generally have an idea that they want to make a return on that investment, but you know, that's some ways where the similarities might end. I mean, there, there, there are two different beasts to take that analogy a step forward. Uh, You know, um, and a lot of it has to do with where the company's at in its life cycle. Um, a lot of it has to do with, you know, um, some characteristics of the business, whether it money, doesn't make money, you know, um, all these factors that go into

emily-sander_1_12-17-2024_160525:

Okay.

squadcaster-jidf_1_12-17-2024_160524:

PE.

emily-sander_1_12-17-2024_160525:

So for like those who are like, what the heck, what the hell are you talking about? BC is venture capital and it's another source of wealth. Capital. It's another source of investment and it works in a lot of ways, similar to P E. So like broad strokes, same general structure and makeup. It typically comes earlier in the process. So like startups, um, might get angel investors and then they might get VC funding and then maybe they stay there forever. And maybe a subset of that goes on to then have P E. Investors.

squadcaster-jidf_1_12-17-2024_160524:

Yeah. I

emily-sander_1_12-17-2024_160525:

are broad, broad strokes.

squadcaster-jidf_1_12-17-2024_160524:

look at it is, you know, I've read, there's a lot of statistics out there, but the ones that stick out in my mind are, know, only 10 to 20 percent of all venture backed companies. successfully exit to an acquisition or an IPO. So you kind of think about that acquisition piece being where PE oftentimes will come in. Um,

emily-sander_1_12-17-2024_160525:

And then

squadcaster-jidf_1_12-17-2024_160524:

takes a while to get there at times, you know, um, for businesses and they may never get there like Ed said.

ed-barton_1_12-17-2024_160524:

Yeah, the, the

emily-sander_1_12-17-2024_160525:

the,

ed-barton_1_12-17-2024_160524:

PE side. You're looking at businesses where they expect to have about a 80 percent to 90 percent success rate. And, or, you know, if you want to use a baseball analogy, I'll use a Mariners baseball analogy.

emily-sander_1_12-17-2024_160525:

oh boy,

ed-barton_1_12-17-2024_160524:

PE is like each row, they get up, they get a lot of hits,

squadcaster-jidf_1_12-17-2024_160524:

Yeah. Yeah. They can. Yeah.

ed-barton_1_12-17-2024_160524:

they're moving around the bases. They're gonna steal a base here or there, but they're really hitting for average. if you've got someone like, we'll call it an Adrian belt tray,'cause I'm gonna give my, give my age where their batting average, while they were in Seattle, everywhere else was fine while they were in Seattle. Might be down around two 30, they can hit the long ball. And so they're up there kind of swinging away and in the four hole trying to trying to knock out the long ball. So the difference is venture firm, they're, they're looking for home runs, they're looking for 10 X, 12 X returns. And they recognize, like Rory said, that 80 percent may end up at zero, or they'll be lucky to get their capital back. If that was in P. E. land, that would be catastrophically poor. Batting average, they want an 80 to 90% batting average, but they're looking for, you know, 20, 25% returns, not, know, 1000% returns on 10% of the portfolio.

emily-sander_1_12-17-2024_160525:

but they have more swings at bat. Right.

ed-barton_1_12-17-2024_160524:

Hard to say. I, I, I would, I would say you've got a much larger pool of potential venture, potential venture. Um. just because almost any startup, especially in the tech side, tend to be a venture potential venture investor. Whereas as Rory noted on the P. E. side, they're looking for far more mature organizations where they're probably making money, you know, and so it's a it's a smaller universe, a little

emily-sander_1_12-17-2024_160525:

But don't they have, well, okay. I was going to say, don't they have more companies in one fund or is that not the case

squadcaster-jidf_1_12-17-2024_160524:

I mean, let's, let's kind of take it up another level. So We talked about the foundation of private equity funds being the LP investors, right? venture funds also have LP investors. And oftentimes those LP investors have a private equity strategy and a venture strategy. They don't look at them as the same class of investment, higher risk, higher return, like Ed said. So allocating capital from LPs You know, spans both PE and venture. So, you know, whether the size of the fund or the number of portfolio companies in the fund that may vary or may be similar across, you know, different parts of the market, larger institutional, however you want to put that, um, it's just a different class of investment altogether. You know, you, it's a private investment, which is why you kind of put those two in the same bucket. But, you know, as far as the risk return profile, what it comes down to is they are quite different. Um, and you know, some would say venture being more speculative.

emily-sander_1_12-17-2024_160525:

when the Orissa laws passed in the eighties that allowed 10 percent into high risk, high risk vehicles, did that, does that include both VC and PE or just one or the

squadcaster-jidf_1_12-17-2024_160524:

Ooh, that's a good question. I bet Ed's got an answer to that. I don't.

ed-barton_1_12-17-2024_160524:

In general, in general, yes. Um, because the risk is driven as much by liquidity risk as it is by

squadcaster-jidf_1_12-17-2024_160524:

Yeah.

ed-barton_1_12-17-2024_160524:

perception of, this perception of, oh, my gosh, these are small companies. It's really how liquid how quickly can you turn that security into cash? And so that that's the, that's a hot. A higher risk. And so as a result, that's, they generally will fit in that same bucket.

emily-sander_1_12-17-2024_160525:

Okay.

squadcaster-jidf_1_12-17-2024_160524:

you know, from a founder's perspective too, right? Like more likely that a founder will take on venture. Investment, but give up less of the company to do so. In other words, depending on that series or where that, you know, VC investment comes in, founders still controls most, a lot of the company by design, uh, when you get towards PE, as we've talked about, you know, PE's mostly taking a control position. At that

emily-sander_1_12-17-2024_160525:

Okay. What's, so what are like, what are the main things that are similar between VC and PE and what's the, what are the main differences?

ed-barton_1_12-17-2024_160524:

So I'll hit, I'll hit the biggest similarity, which is they're both a source of growth capital,

emily-sander_1_12-17-2024_160525:

Okay.

ed-barton_1_12-17-2024_160524:

they're, they're both ways that you can infuse cash into the business. One of the biggest differences that is related to that is generally on a private equity side, the ownership The, the ownership selling ownership is taking cash out of the business and putting it in their pocket. Generally in venture, there's no cash going out of the business in bleeding

squadcaster-jidf_1_12-17-2024_160524:

Yeah.

ed-barton_1_12-17-2024_160524:

infusing additional cash to keep it alive and allow it to grow to the next stage. So the. They're both sources of capital, but the biggest difference is how that capital is generally going to be used on the, on the backside of the transaction.

squadcaster-jidf_1_12-17-2024_160524:

I was just gonna add it from slightly different angle is, you know, comes back to the investment thesis for, you know, both of those categories. So look, venture investment often times is just a pure bet on an idea or a founder that's been successful in the past. I've heard of and, and sort of been close to business that are not only pre revenue, but like pre product. you basically are dealing with a serial entrepreneur that people put trust in and they're willing to roll the dice that, hey, this person has done three businesses and exited successfully. Why can't they do a fourth? And I'm willing to put some, some money behind that. PE is a much more. Much different approach, I would say not to say that they don't bet on management teams, but it's more management team and also a viable business and, you know, not only viable business, but, you know, profitable at the time they invest, you know, so I guess a simple way to think about it is maybe, know, And we've talked about it, you know, to be attractive to PE group, you've got to be generally cashflow positive and have a certain amount of revenue to start, uh, before, you know, it makes sense for PE group to come in.

emily-sander_1_12-17-2024_160525:

You have to be a little bit more proven.

squadcaster-jidf_1_12-17-2024_160524:

Yeah. That's a good way to put it. Exactly. Right. Yeah.

emily-sander_1_12-17-2024_160525:

Okay. I think another thing people here tossed out are like Series A and Series B and Series C. And in my experience, the way those are used really depends on the VC fund and like the exact situation. There's no like standardization.

ed-barton_1_12-17-2024_160524:

It's a,

emily-sander_1_12-17-2024_160525:

Yeah.

ed-barton_1_12-17-2024_160524:

order in which,

emily-sander_1_12-17-2024_160525:

Yes. Sure.

ed-barton_1_12-17-2024_160524:

A, B,

squadcaster-jidf_1_12-17-2024_160524:

I had an argument about this today with a client of mine. It was like, you know, there's a perspective that it has to do with much money's been raised to date. There's a perspective that has to do where the company's at as a business in its own life cycle, you know, so yeah, it's it's uh, yeah, it just really is just a sequential, uh, sequen

emily-sander_1_12-17-2024_160525:

Yeah,

squadcaster-jidf_1_12-17-2024_160524:

rounds that are priced, basically.

ed-barton_1_12-17-2024_160524:

normally your a round is going to be your first institutional round. And

squadcaster-jidf_1_12-17-2024_160524:

Correct.

ed-barton_1_12-17-2024_160524:

be seed

squadcaster-jidf_1_12-17-2024_160524:

Yeah,

ed-barton_1_12-17-2024_160524:

to essentially seed the business, to get it to, to, to plant the seeds. And then it starts to grow.

emily-sander_1_12-17-2024_160525:

okay.

ed-barton_1_12-17-2024_160524:

got A through, A through Z rounds after that.

emily-sander_1_12-17-2024_160525:

I've seen some cases where like it's just at the discretion of the fund. There's no like you hit this. Sometimes I've seen there you hit this milestone, and then that opens up the potential for further funding. But I've mostly seen it at discretion. Is that what you guys have seen or other models?

squadcaster-jidf_1_12-17-2024_160524:

yeah, it's as you say, it's, it's kind of a discretionary thing,

emily-sander_1_12-17-2024_160525:

Okay.

squadcaster-jidf_1_12-17-2024_160524:

targets and milestones for different businesses and different funds. There's no universal.

emily-sander_1_12-17-2024_160525:

Okay. So let's move into P. E. So let's do kind of like a recap really quickly. So founder starts a company, like it's just a, it's just an idea and a dream. And then they get family and friends money and they start a little office in their garage and then they get pre seed money or does angel investor can come in there too.

ed-barton_1_12-17-2024_160524:

Seed,

emily-sander_1_12-17-2024_160525:

angels, pre seed,

ed-barton_1_12-17-2024_160524:

Friends and Family, that's all kind of the pre institutional money.

emily-sander_1_12-17-2024_160525:

pre institutional money.

squadcaster-jidf_1_12-17-2024_160524:

handshake type of deal, you know, like the back of the envelope, you know, let's, let's pass the hat around and get some money in. Yeah.

emily-sander_1_12-17-2024_160525:

Yeah. But if you've got like VC, like if you're in your series B, like you've got like an office, you've got people, you've got recruiting and hiring and, and teams going on. And then there comes a point where I guess about 20 percent will say, okay, we want to take a look at taking on Additional investment from a private equity fund. What does that transition look like? What does that decision look like? How, when, why would you do that? Ed go.

ed-barton_1_12-17-2024_160524:

Interestingly, you're, a lot of times you're not going to see those two streams cross early. generally what you're going to see is a company may be initially VC funded. And get to a certain point public, then begin to kind of stagnate as a public company. And at that point they may get picked up by private equity and taken private.

squadcaster-jidf_1_12-17-2024_160524:

right.

ed-barton_1_12-17-2024_160524:

Um, but you tend not to see, a VC backed company. know, again, they will, you will have VC back companies as zombie themselves where

squadcaster-jidf_1_12-17-2024_160524:

That's right. No

ed-barton_1_12-17-2024_160524:

a certain point, they're spending enough cash flow where they won't die, but they're, they're not spending enough cash flow where the private equity guys are looking at this as a, you know, really good investment for, for that fund. They may at that point, flip it out to, um, flip it out to a private equity fund that is looking to either in kind of bring that. That technology or that company into their portfolio generally is a

squadcaster-jidf_1_12-17-2024_160524:

quasi strategic buyer style. Yeah.

ed-barton_1_12-17-2024_160524:

of their portfolio companies, but the two tend to, once you start off again, once you kind of start off in a venture world, you're generally going to fly or die. It's, it's either taken off or you're going to blow up. if you in the private equity world, you've generally bootstrapped yourself to the point where, you know, the company's, the company's gotten to a point where private equity sale becomes a method of liquidity, gaining liquidity for the ownership. Um, as opposed, and you're growing at a nice steady 25, you know, 30 percent

squadcaster-jidf_1_12-17-2024_160524:

Yeah. 30 and

ed-barton_1_12-17-2024_160524:

rate as opposed to 300 percent

squadcaster-jidf_1_12-17-2024_160524:

30. Yeah.

ed-barton_1_12-17-2024_160524:

Yep.

emily-sander_1_12-17-2024_160525:

So is it more likely that like as a founder, you would build a company for go VC funding? Cause you're doing fine by yourself. You have a, you have a proven product and company up and running and then you go direct to PE.

ed-barton_1_12-17-2024_160524:

Yeah. You would not see, I mean, interestingly, the way you frame that up provides a really. Interesting insight into who goes for what. If you have the capital to bootstrap your startup to the point where you can get the PE VC, wouldn't even look at it. VC looks at companies where it's like, if this thing takes off, we need to just pour capital on this thing until, you know, we're watching the flames as it burns, you know, but we know that at some point this is going to turn into a rocket ship, you know, that's

emily-sander_1_12-17-2024_160525:

They're going for the moonshot, like moonshot.

ed-barton_1_12-17-2024_160524:

and so normally a typical founder doesn't have the capital to do the moonshot. And so that's where the VC comes in. If they have the capital, they're probably at a good, steady, solid growth rate, you know, that 30 percent growth rate, 40 percent growth rate, they're self funding. And that's a classic PE type structure. That's a classic PE type target.

squadcaster-jidf_1_12-17-2024_160524:

Yeah.

emily-sander_1_12-17-2024_160525:

Okay.

squadcaster-jidf_1_12-17-2024_160524:

Cause

emily-sander_1_12-17-2024_160525:

And,

squadcaster-jidf_1_12-17-2024_160524:

remember what we talked about, you know, with, uh, With private equity, so much of the deal deals that they do are dependent on adding leverage to a business where, you know, if you don't have cash flow to support a, you know, um, you know, newly, issued debt, then, you know, it's not going to work. And that's like, largely the case for a lot of startups that are literally have no cash, you know, so, or they're burning through cash at a clip that's not going to support a bank loan, you know, so,

emily-sander_1_12-17-2024_160525:

and the way the math works for like the VC fund is, let's say you have 10 companies

squadcaster-jidf_1_12-17-2024_160524:

yeah.

emily-sander_1_12-17-2024_160525:

you just know statistically nine of them are going to just crash and burn and be nothing, but the 10th will do a moonshot that and the, the gains on that one will cover all the other losses that you've taken out of the 10. That's kind of the game they're playing.

ed-barton_1_12-17-2024_160524:

the losses. Plus give you a 30

emily-sander_1_12-17-2024_160525:

Yes.

squadcaster-jidf_1_12-17-2024_160524:

Yeah,

emily-sander_1_12-17-2024_160525:

Yes.

squadcaster-jidf_1_12-17-2024_160524:

yeah,

ed-barton_1_12-17-2024_160524:

thing.

emily-sander_1_12-17-2024_160525:

Yes. Okay.

squadcaster-jidf_1_12-17-2024_160524:

just a, I just, you know, there's no other way to say it. There's just a, a different feeling about, you know, optimism in, in startups and venture backed companies. Then a P a P is much more approached as kind of like a. a financial play rather than a, you know, like a growth story, you know, um, uh, it, that sounds very qualitative and it is, but that, I think that's a, that's a reality. People tend to be either venture people or P people. I've begun working with some, some, some early, really early stage companies and it is completely different. Then my experience having worked in PE for 20 years, it's, it's definitely a different, perspective. Um, not, not one is not wrong or one is not, uh,

emily-sander_1_12-17-2024_160525:

Right. Appreciate it.

squadcaster-jidf_1_12-17-2024_160524:

uh, better. It's just different. You know,

ed-barton_1_12-17-2024_160524:

Finance, finance guy does not like. The burning cash

squadcaster-jidf_1_12-17-2024_160524:

there's a little, yeah, I mean, yeah. If nothing else, burning cash is the, you know, it just, it just, no matter what, it never makes sense to me, but you know,

ed-barton_1_12-17-2024_160524:

back to the analogy I used it the earlier on the baseball side, you know, on a VC, you're, you're generally going to have, you know, they're, they're not gonna have a 1 in 10. They're likely to have about a 400, you know, a 40 percent but of that 40%, if it's 10. the four of that actually don't flame out, you're going to have two zombies in there that are basically going to be, they're going to be surviving, but they're not going to give them a real return. They may have a negative return, but they won't die. got one. That's going to be a nice, you know, 30, 40%. 50 percent annualized return. And then you're going to, their goal is to have one out of 10 or one out of 20 be a thousand percent return, you know, 10 X, 20 X, and that's really the, and then you're going to have four or five of them that are not going to. you know, they're going to go to zero.

emily-sander_1_12-17-2024_160525:

Yeah. So wait. So in your analogy was Ichiro a PE firm

ed-barton_1_12-17-2024_160524:

No, each row. Yeah. Each row is more of a PE firm. He's really like, he's sitting for singles and doubles. It's on base. It's moving around the bases. It's

emily-sander_1_12-17-2024_160525:

and it's more predictable and consistent and like, so if you have like a good stretching routine and habits that you do to like get yourself, your swing might look changed to an American audience, but like, Oh, it works. So keep doing it. Amazing. That's Ichiro. Okay. So that's PE firm.

ed-barton_1_12-17-2024_160524:

The other side to the, to the equation on the, on the private equity side is, you know, if, like I said, if they end up with a 40 percent hit rate, they're failing,

squadcaster-jidf_1_12-17-2024_160524:

Big time.

ed-barton_1_12-17-2024_160524:

hard.

squadcaster-jidf_1_12-17-2024_160524:

Yeah.

ed-barton_1_12-17-2024_160524:

mean, they, they should be in the eighties to nineties. Um, but the, the concept where you've got this strange area where the two will play with each other, like I said, is, is like the zombies in the, and that's a, that's a technical term

squadcaster-jidf_1_12-17-2024_160524:

Yeah.

ed-barton_1_12-17-2024_160524:

DC, the zombies, where, uh, They just won't die, they're not good enough to, they're not, they're not alive and they're not dead. They're just kind of there doing their thing, but they just, and I've got one of the, one of the companies I'm working with now is a zombie. It's essentially a company where they're down to like their last four or five employees. They've got, you know, they're, they're got enough revenue to pay the bills. They can't grow and they, and we're not shutting them down. And so they're just kind of cranking along

emily-sander_1_12-17-2024_160525:

So. Thank you. Okay.

ed-barton_1_12-17-2024_160524:

Break even.

emily-sander_1_12-17-2024_160525:

So let's take the analogy of, of 10 companies and I just picked 10 cause it's easy math. So where the VC wants one of them or a small percentage to go like a thousand percent for a PE firm, the equation is almost flipped where it's like they'll take one or two clunkers, but the rest have to hit at like two to five X. Is that generally

ed-barton_1_12-17-2024_160524:

Yeah.

emily-sander_1_12-17-2024_160525:

acceptable? So,

ed-barton_1_12-17-2024_160524:

two to five is, is pretty legit over a five year hold. And, and the, even the clunkers

squadcaster-jidf_1_12-17-2024_160524:

Yeah.

ed-barton_1_12-17-2024_160524:

my experience. Um, and Rory and I have worked with some of the same private equity firms. Even the clunkers are underwritten so that if they have to

squadcaster-jidf_1_12-17-2024_160524:

Yeah.

ed-barton_1_12-17-2024_160524:

zero

squadcaster-jidf_1_12-17-2024_160524:

That's what I

emily-sander_1_12-17-2024_160525:

Yeah.

squadcaster-jidf_1_12-17-2024_160524:

I mean,

ed-barton_1_12-17-2024_160524:

still gonna be able to sell out of those and get.

emily-sander_1_12-17-2024_160525:

They make it so they can't lose it. And

squadcaster-jidf_1_12-17-2024_160524:

directors at a VC firm literally say, you know, I'm looking for that one or two out of 10 to really hit, know, zero directors at a PE to say, I'm going to be accepting one to two losses on my portfolio. They're not, they're going to be like, I want about a thousand. I may make, you know, One and a half to two X on a couple of these, but I'm making money because I'm at a financial, financially engineer my way out of a return or into a return, no matter what.

ed-barton_1_12-17-2024_160524:

The one private equity firm that the three of us all worked with when I would go to their annual meetings and, and get a chance to take a look at what the performance of those portfolio companies were out of like 70 four funds, may have had two that went to zero. Yeah,

emily-sander_1_12-17-2024_160525:

sometimes they'll flip them into dividend plays, which we can talk about. Like the timeline stretches way out and they just take dividends month over month and the whole thesis and how you operate that company changes, but they can flip them into that.

squadcaster-jidf_1_12-17-2024_160524:

Yeah.

emily-sander_1_12-17-2024_160525:

I remember

squadcaster-jidf_1_12-17-2024_160524:

mode in that case.

emily-sander_1_12-17-2024_160525:

turtle mode. I love that. Okay. Turtle mode. Oh my gosh. Um, but I remember us three talking about like, Hey, we were at this place with the PE firm and we were like, Out of like, I think it was 12, 12 companies in our fund. I can't remember, but we didn't want to be like the very last certainly, but we didn't want to be like the very first there's like a sweet spot where if you were like second or third best, like they just, they just keep giving you what you need, like anything you need, like, let us know, but like they let us run the company and that was like the sweet spot.

squadcaster-jidf_1_12-17-2024_160524:

keep getting whatever you need.

ed-barton_1_12-17-2024_160524:

that's,

squadcaster-jidf_1_12-17-2024_160524:

been a middle or back of the packer or something like that. Cause it's always been a grind.

ed-barton_1_12-17-2024_160524:

might be a bit of a stretch. But yeah, the one

squadcaster-jidf_1_12-17-2024_160524:

Yeah,

ed-barton_1_12-17-2024_160524:

one of three of us worked at was a solid, it was a solid performer. It was mid pack

squadcaster-jidf_1_12-17-2024_160524:

really good.

ed-barton_1_12-17-2024_160524:

Um, and we were largely left alone. There was always pressure. How are you going to grow? Are you

emily-sander_1_12-17-2024_160525:

Sure.

ed-barton_1_12-17-2024_160524:

How are we going to, you know, they would re lever the thing. And Be like, stop, you know, I'm getting panicked because you're going to screw up

squadcaster-jidf_1_12-17-2024_160524:

I need some breathing room.

ed-barton_1_12-17-2024_160524:

We're just getting comfortable and now you're going to throw additional leverage on dividend dividend crap out um, and that would be you know, that's a that's But you're fairly much left alone now the last the last P back back company I ran, we were the run of the litter you know, and were not left alone. And it was, you know, calls multiple times a week on where's the revenue and how are you going to cut more expenses?

squadcaster-jidf_1_12-17-2024_160524:

Yeah,

ed-barton_1_12-17-2024_160524:

you know,

emily-sander_1_12-17-2024_160525:

Like, you don't want to be at the ends, like the extremes. Cause,

ed-barton_1_12-17-2024_160524:

I don't mind being at the top.

emily-sander_1_12-17-2024_160525:

but that, I mean, doesn't that come with its own pressure though?

ed-barton_1_12-17-2024_160524:

does, but that pressure is good pressure. Cause you're going to get paid. You know, you know, it's, you're going to make it rain.

emily-sander_1_12-17-2024_160525:

Okay,

squadcaster-jidf_1_12-17-2024_160524:

is when it's an absolute grind. And you're like, I do not see the carrot at the end of this stick.

emily-sander_1_12-17-2024_160525:

fair.

squadcaster-jidf_1_12-17-2024_160524:

or the light at the end of this tunnel, whatever analogy or pot of gold at the end of this

emily-sander_1_12-17-2024_160525:

But some of them, some of them get like real excited by the leader and it's like, okay, I want, I was good with like a three X and now I want like a six to seven. And they go crazy with it. Cause they think they can like beat me. Make it more and it's like, just stick with the stick with the program, double down on stuff and let's get a really good return on this.

squadcaster-jidf_1_12-17-2024_160524:

Yeah.

emily-sander_1_12-17-2024_160525:

X is a good return for everyone that makes everyone happy at the end of the day. OK,

ed-barton_1_12-17-2024_160524:

in the

emily-sander_1_12-17-2024_160525:

so

ed-barton_1_12-17-2024_160524:

world, that's not how it works. It

squadcaster-jidf_1_12-17-2024_160524:

No.

ed-barton_1_12-17-2024_160524:

you're driving all the time

squadcaster-jidf_1_12-17-2024_160524:

Yes.

ed-barton_1_12-17-2024_160524:

up or grow up. And you've got, you've really got no, and it is like,

squadcaster-jidf_1_12-17-2024_160524:

It's good.

ed-barton_1_12-17-2024_160524:

like a marathon at a sprinter's pace.

squadcaster-jidf_1_12-17-2024_160524:

Yep.

emily-sander_1_12-17-2024_160525:

there is no turtling up. You will blow up or grow up.

squadcaster-jidf_1_12-17-2024_160524:

man. You are not the, you're not of the tortoise in this case. You're the

emily-sander_1_12-17-2024_160525:

Yeah, you need to be a hare with your butt on fire running as fast as you can. Um, okay. So let's just say, like, I know the probability is low, but someone has pre institutional money and then P. E. money. Let's just say that. How does the makeup of like the waterfall and the board seats and all of that go down when you have like an initial round of, you know, Of fun of funding and investment. And then you have PE come in. How does that all get shaken out?

ed-barton_1_12-17-2024_160524:

I'll give the, it depends. Um, we went through Rory and I went through that exact scenario where we were at a company that was essentially angel backed, by folks as famous as like the chairman of the federal reserve was one of the, was a partner of one of our board members, a retired chairman of the federal reserve. So it was a, you know, highly sophisticated board. Um, they were angel investors or investments were seven figures. Um, and it funded a very, very, very successful company. Um, when

squadcaster-jidf_1_12-17-2024_160524:

It's always funny how money has a way of sniffing out more money. You know what I mean? Like

ed-barton_1_12-17-2024_160524:

Follow, follow the,

squadcaster-jidf_1_12-17-2024_160524:

it just, it's just.

ed-barton_1_12-17-2024_160524:

money.

squadcaster-jidf_1_12-17-2024_160524:

exactly.

ed-barton_1_12-17-2024_160524:

and, and the, uh, when the PE guys came in, a number of them took, took the, um, took the money and left. but what the founder did was he essentially negotiated a second board seat. So he said, I've got two board seats. And he took. of the more sophisticated board members of the folks who cashed out and brought them back on as a board

squadcaster-jidf_1_12-17-2024_160524:

Yeah.

ed-barton_1_12-17-2024_160524:

Well, otherwise it becomes kind of a negotiation during the deal of, okay, how many board seats are there going to be? What's percentage of what percentage sold? And then, you know, is there going to be a pro rata allocation of board seats and depending on what that pro rata Percentage looks like you may end up with a board that expands from four to 14 Or you may end up with a board that goes from four to five but the old board Reduces down to two seats and the pe guys come in with three if they got majority control

emily-sander_1_12-17-2024_160525:

Do you want to quickly explain pro rata? Yeah. Yeah.

ed-barton_1_12-17-2024_160524:

in proportion to your ownership percentage

squadcaster-jidf_1_12-17-2024_160524:

Yeah.

ed-barton_1_12-17-2024_160524:

In that particular case,

squadcaster-jidf_1_12-17-2024_160524:

That's why, uh, you know, you hear dilution in that term so much on the early stage businesses is because You know, you're, you just keep splitting a company up in terms of allocation of ownership, but, you know, you got to be really careful as a founder, how much you're giving up for how much money you're taking on, you know, I feel like kind of at the private equity level, it's a little, you know, you're, you've already done that enough and at a point it becomes a little more. Straightforward at that, at that level. But, um, but yeah, like early on, every dollar you take on, you gotta be very careful about what you're giving up for that dollar, but it gets harder to justify that based on how do you value your company? That's pre revenue, pre idea, pre whatever, you know? So

emily-sander_1_12-17-2024_160525:

So would you say, you mentioned this earlier, but at the VC phase, the founder is still largely quote unquote in control, like they are, are they the majority owner, they're like the head of the board, they can make decisions about who's on the board and decisions about the company

squadcaster-jidf_1_12-17-2024_160524:

typically

emily-sander_1_12-17-2024_160525:

and things like this, you know, And then when they move into P. E. land, things change.

ed-barton_1_12-17-2024_160524:

even on

emily-sander_1_12-17-2024_160525:

so

ed-barton_1_12-17-2024_160524:

things will change. There

squadcaster-jidf_1_12-17-2024_160524:

Oh, definitely. Yeah. Yeah.

ed-barton_1_12-17-2024_160524:

the, where the founder, where the founder dilutes is diluted down to the minimus. Amounts, but that de minimis amount may be, you know, still a very lucrative

emily-sander_1_12-17-2024_160525:

sure.

ed-barton_1_12-17-2024_160524:

They may

squadcaster-jidf_1_12-17-2024_160524:

Smaller

ed-barton_1_12-17-2024_160524:

voting rights,

squadcaster-jidf_1_12-17-2024_160524:

piece of a massive pie. Right. Yeah.

ed-barton_1_12-17-2024_160524:

it's normally when you've got something going to the moon. So everybody wants on board. So you, you hear about the things like Facebook where like Zuckerberg still got control because he's got restricted shares that have super, super majority rights or super majority voting rights and all this other stuff. That's unusual. And that's, that becomes possible only if that VC Backed company takes off like a rocket ship is a rocket ship. And when you're going out for subsequent funding rounds, you're pricing those at a, at a premium price. People are clamoring to get on board and you're the, the seller becomes the dictator of terms

emily-sander_1_12-17-2024_160525:

Hmm.

ed-barton_1_12-17-2024_160524:

to, as opposed to really having to go out like a P normally you're going out, like I'm selling the company and you're doing a window dressing and stuff. Some of the VC backed companies, when they're taking off like that, when they're unicorn type company, they're going to end up. Where they are in the driver's seat as to what those transactions look like.

emily-sander_1_12-17-2024_160525:

Yeah. I mean, most of the time it's like a founder in their basement saying, please give me any funding you can. But I think Rory mentioned earlier, like if you have a proven entrepreneur who just like is serially like successful and they're doing their next big thing, B. C.'s like want in on that. So the dynamics flip a little bit. If you're if a founder is listening to this, And wants to kind of keep track of, okay, I'm kind of hearing like VC as an option, or I could go straight to PE and grow it myself. And there's different, there's just different trade offs. There's no right or wrong per se. It's just your setup and again, why you're doing it, what you want, what are some other things that they should be thinking about?

ed-barton_1_12-17-2024_160524:

is a right or wrong, actually, I'll

squadcaster-jidf_1_12-17-2024_160524:

There is.

ed-barton_1_12-17-2024_160524:

There is

squadcaster-jidf_1_12-17-2024_160524:

I

emily-sander_1_12-17-2024_160525:

Okay.

squadcaster-jidf_1_12-17-2024_160524:

this. Yeah. I know where you're going.

ed-barton_1_12-17-2024_160524:

right is you have to pick which kind of your adventure wisely. So it's if you are a rocket ship or you think you're going to be a rocket ship or your business is structured as a, as an idea that could, you know, be a billion people want to do it. VC is the only way you're going to go. It's the only folks that are going to listen to you. It's the only people who are going to be willing to write a check to watch you burn it with the hopes that you're going to achieve a billion dollar. Or a billion dollar valuation on a PE side, if you bootstrap the thing, or you're, you're like, I don't see how this becomes a billion dollar company. This is a good, good business. That's in a, that's got a good niche. That's going to really grow that, you know, could grow at 20, 30, 40 percent a year with some capital and, and some expertise. That's a PE backed business. Venture is not going to be interested. And you can burn a lot of time, energy, and effort trying to chase the wrong money.

squadcaster-jidf_1_12-17-2024_160524:

Yeah, we're chasing any money to be honest. So, I mean, I'd say the other, I thought we were going to go here. I agree with what you said, but I would also say the other right answer is bootstrap it all the way. Don't take on extra money. Don't take on outside money. If you can, if you can get it to the point where you don't need that, like, you know, operating cash flow or should say, you know, outside investment just to keep the lights on and you can bootstrap it to the point of, you know, You know, PE level, uh, growth capital, do that. Don't mess around in the middle. Like, if you can bootstrap it, bootstrap it. You know, it's going to be best for your outcome. You're going to retain the company much longer and have a, have much more leverage and have to give up as much along the way.

emily-sander_1_12-17-2024_160525:

Okay. If someone is entertaining VC or PE money, what are some things they should look at to protect themselves in terms of like, I don't want to get diluted or I don't want someone to put one past me where they give me like this template. I don't understand. So I sign it. What are some key things they should look for?

squadcaster-jidf_1_12-17-2024_160524:

going back to, uh, I believe a couple episodes ago, we said, get your team around you. know, you be, you want to be working with good lawyers, good advisors, You know to help you along the way if you try to you know, if you're if you're if you're not experienced in these things you will get taken to the cleaners. Um, so make sure you've got good representation you cut a deal. I mean, that's the first, first order of business.

ed-barton_1_12-17-2024_160524:

Yeah, there's, and there's a couple, couple other things even before or in parallel to putting that team around you. Um, the first one is talk to some folks who have been there, done

squadcaster-jidf_1_12-17-2024_160524:

Yeah.

ed-barton_1_12-17-2024_160524:

from the founder seat. So there's, you know, different, different, especially in areas like Seattle here where you've got a lot of founder, founder built businesses and folks who have gone through this exercise and succeeded and failed. You've got resources to be able to kind of sit down and hear the stories. I mean, you're hearing our stories and we've been through it. There's here in, you know, if you just think about Seattle alone, there's probably 5, 000 other people

squadcaster-jidf_1_12-17-2024_160524:

Yeah.

ed-barton_1_12-17-2024_160524:

sit down and have similar conversations. Pick those brains. The other is there's a lot of, you know, kind of shameless plug for the book, but there's a lot of books out there that, you know, talk about private equity. You know, we not a lot on private equity, which is why, you know, we're, we're so good at helping people, but there's, you know, private equity and a lot of startup. Um, you know, how to fund your startup and, you know, some of the private, the, the private money and how to raise seed rounds, they're not going to get you from here to there. And there's no replacement for having the right resources around you, but they will give you an idea of the environment, the type of questions to ask, and kind of a, at least a framework from which to be able to operate. And so I,

squadcaster-jidf_1_12-17-2024_160524:

Yeah.

ed-barton_1_12-17-2024_160524:

Recommend, I'd recommend that in parallel with trying to determine who your advisors are and make sure you get a good team around you.

emily-sander_1_12-17-2024_160525:

all right. So assemble your team, get your resources going. There's places like startup grind in Seattle. That's literally for founders, uh, doing the startup thing and they have tremendous resources there. There's platforms like Y Combinator where you can get connected with the people you need to, uh, podcast wise, you're in the right place. So great job. And then book reading wise, there are. Dozens, probably hundreds. But the one you want to start with is on ramp to exit. And we'll have a link for that in the show notes it's available on Amazon and anywhere books are sold. And we will catch you next time on the private equity experience podcast. Thanks guys.

squadcaster-jidf_1_12-17-2024_160524:

Thank you.