4 pointers for seeking private capital today

Investment firms offer advice on growing your business as access to capital tightens.

From private equity firms to venture capital funds, entrepreneurs have multiple options for seeking private investment capital to fund growth. However, as the market for capital tightens, founders need to determine their best strategy and the timeline for moving forward. Here’s some advice from leading investment firms, along with our take.  

1. Start seeking private capital as early as possible and get to know prospective funders.

Many investment firms have not been doing deals in FY23 because the math doesn’t work in terms of valuations, says Jonny Jones, CEO of McArron Partners. Given that it takes more time in the current environment to raise capital, start the process of finding an investment firm as early as possible. Starting early helps entrepreneurs develop a relationship, identify what type of solution or products they should develop that appeal to both markets and investors, and then determine whether their cultures are compatible with potential investors. “Learn as much as you can about the firm and really understand their decision-making process,” says Kaitlyn Desai, Manufactured Products Principal at Pritzker Private Capital.

2. Weigh the virtues of majority vs. minority ownership.

While giving up majority ownership may help you access capital faster, it also means that you “are not driving the car anymore,” says Brian Dunlap, Managing Director at Blackstone. “The investor will control the budget and have the ability to hire and fire management, including the founder.” Founders can take steps to weave in protective provisions into the terms of the deal, but they need to be ready to accept the terms if they sell a majority stake.

3. Know when you’ll be able to show results and a return.

“When someone provides outside capital, they want to get a return on investment,” says Rob Theis, General Partner and Chief Investment Officer at World Innovation Lab. “You need to figure out your time horizon and be honest. I often ask executives whether they are really trying to build something and solve a problem or just following the money.” Investors will be more likely to reward companies that come to the table with a realistic growth plan and go-to-market strategy.

4. Companies securing private capital must build a strong value proposition.

Companies that develop a “must-have” value proposition, one that features a tool, platform or service that enables customers to streamline operations or reduce expenses, will be in a much stronger position to attract investment dollars during this downturn. At the same time, investors have also been eager to support emerging companies that can provide innovative sustainability solutions. In fact, energy was one of the few sectors that outperformed its 2021 numbers in 2022. Companies that offer compelling “out of the box” sustainability plays are drawing increasing attention from investors.

In a market in which private capital may be harder to secure, it helps to remember that many market leaders were founded during tough economic times. Investment firms recommend starting the process early, determining if minority ownership is an option and developing a realistic growth plan. If companies have a value proposition that demonstrates a clear path to profitability, investors will take notice.