Working The Private Equity Circuit

Are you a prime candidate for venture capital or other private investment backing? Here's how to get in the game.

funds totaling $300 million.

Although dissimilar, private equity transactions can be grouped into a few categories, according to Morse:

SEED. At this stage, the business may be no more than an idea. An entrepreneur may need start-up capital for a product or service that’s being developed. You need a business plan to attract backers.

EARLY STAGE. This category usually includes companies that are in the marketplace, perhaps a few years old, but not yet profitable. Capital is needed yet banks aren’t willing to make major commitments. If the early results are positive and are combined with the potential for exceptional future growth, private equity funding may be available.

Money directed to a company during the seed and early stages may be called “venture capital,” which is considered a subset of private equity. However, the lines aren’t hard and fast: some entrepreneurs use the term venture capital interchangeably with private equity. Don’t get hung up on semantics; what counts is whether or not money is available.

EXPANSION. Companies seeking expansion financing may have been around for five or more years and achieved some measure of profitability. “Now they need a significant infusion of capital to move on to the next stage,” says Morse. “There should be a reasonable strategy in place for making the most of expansion capital.”

ACQUISITION. In these deals, an entrepreneur desires financial support to acquire another company where there’s unrealized potential. Douglas’ failed and successful attempts to acquire existing TV stations are examples.

“There’s a continuum of risk here,” says Morse. “An investor who participates in a seed company, for example, is taking much greater risks than an investor who helps a proven entrepreneur buy out an existing company. In return for taking greater risks, investors want the opportunity for greater rewards.” In practice, that may mean offering better terms (giving up more of your company) to attract capital to start-ups and early-stage companies.

No matter what stage your venture is in, you should always keep in mind that the private equity investor intends to make a profit-a large one, in fact. As a rule, private equity and venture capital funds attract money from corporations, institutions, large retirement plans and wealthy individuals. These investors are willing to put up risk capital because they expect a larger return than they could get with Treasury bonds or in the stock market.

“We want to see a realistic growth strategy,” says Ed Williams, managing director of Black Enterprise/Greenwich Street Corporate Growth Partners in New York, a $75 million investment fund that focuses on expansion and acquisition financing opportunities. “We evaluate the management team to determine if they have the relevant experience and expertise to successfully execute their business plan. When you’re seeking expansion financing, there should be strong financial statements to give investors a sense that this is a team that knows how to make a profit,” he adds.

“There are time considerations, too,” says Cleveland A. Christophe, managing partner at TSG Capital Group L.L.C. in Stamford, Connecticut, an $800 million fund that acquires and provides expansion capital to

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