A few years ago I was happily working as a Business Mentor to startups and working with numerous companies helping them with their social media marketing.
I was pitching a disruptive tech company to an acquaintance, Todd Buchanan, founder of Equifaira Advisors (liquidity event planners), whom I had known for over 20 years. All I knew was that he was into helping select companies raise capital for expansion.Little did I know this meeting would open my eyes to private equity financing in a big way.
The company was a dud and I think Todd and I both knew it. An hour before my meeting I had been fired as the consultant to the company because the CEO felt intimidated by me. I felt compelled to present the company to Todd anyway because it was too late to cancel the meeting and I thought he might see more of an opportunity than I did.
Well, the company had bad management, the programmers were managing the founders and if their idea was to be effective they needed a lot of help. It was a pass on Todd’s part to work with them and my ‘exit’ proved out to be beneficial for me in terms of a career move.
While in my past business experience I had focused on marketing I was now introduced to the world of high finance. I had never understood the complexities of private equity financing and was under the impression a company had to be public to raise capital.
Todd made me an associate partner of his firm and showed me the ropes. I came to appreciate while it was good for some companies and investors it might not be suitable for others.
It’s great for companies that have a great scalable product, fantastic management and a vision for the future. It’s not for a dilettante founder who sees capital raised as his personal honeypot.
Private equity investing is good for people to get into an alternative investment early where risk is high but returns are generous. While the risk may be great the securities commission in the jurisdiction mitigates an investment of this kind by regulations.
There are strict rules of ‘engagement’. As a seed round it is usually for friends and family and is limited to the number of ‘friends’ who can invest. It is also limited beyond the friend aspect to those who can ‘afford’ to lose the investment. No one wants to lose money but accredited investors must prove that they are sophisticated enough to understand the implications of their investment in a risky proposition.
As far as a sophisticated investor goes private financing of a company is a good choice. It diversifies one’s portfolio and while it may not be great for your blood pressure at times it certainly is exciting. Until a liquidity event occurs the investment is not fluid.
I’ve been waiting for six years for LUVO, run by former Lululemon CEO Christine Day, to have a liquidity event of any kind. The company is great at ‘giving it back’ to the community, big on philosophy and fund raising but its original private equity investors are still holding certificates.
Like I say to my friends who want to tag along to my private financing opportunities, invest what you can afford to lose!
Normal liquidity happens as part of a plan. The plan is made early on when the money is being raised on how and when the company will pay back it’s original investors. Paying them back means the company is sold, merged/acquired or made public. A liquidity event is the only way an investor can get out of the deal and make money – period!
I have an incredible guy who manages my investments, Carl de Jong of Primerica. I only have mutual funds with him but they are a tad high risk and consistently earn high returns in the double digits. Wonderful for sure until a recent private equity deal earned me eight times my investment after a year.
The ‘rule of 72’ is the number of years your investment will double based on the interest rate. A bank account at 1.6% interest will take your $10,000 about 45 years to double so you can see why private equity deals are so wonderfully lucrative and nice to find.
Typically, liquidity events occur between 3-5 years after the round of financing and start off worth pennies a share.
There are downsides to investing in private equity deals for sure. You can’t get out unless they make it so, its risky as discussed and it is also difficult to find startups worth investing in. That’s the bottom line, finding the companies that are viable enough to put your money into.
When I was with Equifaira their ten point criteria for finding the perfect startup company to work with was the difference between success and failure, between someone losing hard earned money and making a difference in their life.
It seems of me in the financial situation the world is in that small business, startups, people with vision will be the vehicle for the world to become stable. When the entire world is moving from governments running the world to large corporations it’s a time when recessions will be the norm not the exception.
Gary is CEO of Bizzo Management Group Inc. in Vancouver. He has mentored over 1000 business leaders, investors and entrepreneurs. London-based Richtopia placed Bizzo on the Top 100 Global Influencers in the World for 2018.
