Are you looking for money for your start-up or expanding business? Are you looking for a support system that believes in your company? If so, you may be interested in contacting a venture capital firm to help.
These investors will provide capital to foster growth, product improvement, and/or reorganization of company administration and procedures. In order to start this process, your company must create a business plan indicating future intentions, predicted growth rates, expected income, etc. to show to the investors. From there the venture capitalists will look at the plan and decide whether or not to invest. Your company will get funding, networking opportunities, and experience in exchange for some stock and decision control.
I spoke with Bob Crants of Pharos Capital Group, LLC about his experience with private equity funds. Crants graduated from Princeton University with a degree in Economics. From there he went on to work with Goldman Sachs where he won the Goldman Sachs Investment Banking Division Innovation Award. He went on to become the president of Prison Realty Trust and then founded his current company, Pharos Capital Group, LLC. He has been in the business for twenty-one years.
1. How long does it typically take to form a partnership between a small business and your private equity firm?
Pharos will generally spend around 120 days to get from an introductory meeting to a final closing and funding. During that time we will do introductory calls and face to face meetings with management, a site or facility visit to see the business operating in person, the building of a detailed financial model, a due diligence process involving references, suppliers, customer calls etc.; the negotiation of a set of terms and conditions for the transaction, a legal and accounting review, and the drafting of the final legal agreements. Once these steps are complete, funding can take place. In other words, the more of the information that is prepared in advance by the company, the shorter the time period. The more that we have to do independently, the longer the process will take. As with any sales process, coming to the initial meeting prepared can start a transaction down a positive path
2. What advice do you have for someone looking to start a successful small business?
There are lots of things that make businesses successful over a sustained period of time, so the more of those things that turn up in a business plan or an introductory meeting, the more likely the business will be to receive funding, assuming that outside funding is necessary. Of course if someone can set up a small business that is immediately profitable or able to be self-funded because of existing contacts, relationships, contracts etc., then that makes the process easier. So some things that make a business more attractive for Pharos would include:
(1) experienced management- we like to see managers that have direct experience in the field they are looking to pursue. If they don’t have direct experience, then we would like to see previous business success in other, similar types of business
(2) a path to profitability- we don’t like to see plans that generate prolonged periods of losses, even if the ultimate payoff is very large
(3) limited regulatory risk
(4) a diverse group of customers (as opposed to being reliant on one large customer)
(5) barriers to entry
(6) proven demand for the product or service
(7) limited risks associated with `uncontrollables’ such as commodity prices, interest rates, capital markets etc.
(8) a clear path to growth
(9) a thoughtful financial model
(10) a medium to large market opportunity
3. Are there any trends in investment deals that clients should be aware of when deciding to seek funding?
Our firm in particular invests primarily in healthcare companies and business services companies because they are large sub segments of the economy and yet they are not as deeply impacted by the US economy directly. However, there are lots of firms out there that focus on lots of different sectors. Certainly technology, social media, cloud computing, health care accountability are all large trends that firms are looking at, but someone looking for funding should really try to identify an investment firm that would make a good partner for them. In other words, a CEO should be just as selective in making a decision which firm to take money from, as those firms are selective in choosing a management team. Different investment firms have different relationship, areas of focus, time horizons and ability to add value. If it isn’t a fit, there can be frustration and ultimately the deal may fail
4. How many requests do you receive for funding per year? How many actually receive funding? Is it a competitive process?
We either contact or are contacted by anywhere from 2000-6000 companies per year. Of those between 60 and 200 would meet our basic criteria. We would likely conduct due diligence on 20-50 of those, and we make 3-4 investments per year. There is also definitely competition. We will choose the best among businesses interacting with us. But a very strong company may also get term sheets or bids from 3-30 different investment firms. In those situations the competition certainly favors the entrepreneur.
5. What advice do you have for being a competitive and successful applicant?
Be prepared. Come to a meeting or call with confidence, and with a thoughtful amount of detail and analysis. Recognize that investment firms do want to believe in the business proposal being presented, but have also seen every mistake ever made. The more professional and the more questions that can be addressed up front the better. Also recognizing that investment firms make investments with a goal and expectation of generating returns for their investors. If the business plan looks great for the manager but doesn’t generate adequate returns for the investor, there is no way the deal will get funded.
Learn more about Bob Crants and the Pharos Funds team at: http://www.pharosfunds.com/team.php