Tag Archives: venture capital

Shark Tank– TV Reality Show– Epitomizes the Frenzy of Investors Vs. Entrepreneurs in Deals for Funding Ventures…

The Shark Tank (TV reality show) is a prime-time feeding frenzy where investors (sharks) compete among themselves over investing in aspiring start-ups, while ruthlessly chew-up the founding entrepreneurs who are often unprepared in pitching their business… It’s unscripted, real-life drama were neither the sharks (who invest their own money) or the entrepreneurs (who represent a wide range of ventures) are actors. Sharks are multi-millionaire, multi-billionaire angel investors who made their marks, achieved their own brand celebrity… According to Allen Taylor; Shark Tank is more than just entertainment there are real business lessons to be learned… 

First and foremost, even if you are not an investor or entrepreneur you won’t get anywhere in business if you don’t know your value… The best way to win in business is to be prepared. Entrepreneurs who get decent deals on Shark Tank are the ones who know their numberswho anticipate questions while in the hot seatwho respond truthfully, intelligently… and then just maybe they walk away with a deal… In the world of business it’s either– eat or be eaten… You may not be a predator but if you don’t ‘think’ like one, you may very will be next predator’s meal... Hence, if you think like a shark you can avoid serious mistakes and survive to conduct business another day…

In the article Fact-Checked Shark Tank Deals by Emily Canal writes: On Shark Tank, the deals that are made on camera often are not the deals that are finalized… Some entrepreneurs walk away with life-changing deals, but more often than not, those on-air hand-shake agreements change or fall apart after taping. FORBES found that 319 businesses accepted deals on-air in the first seven seasons of Shark Tank and interviewed 237 of those entrepreneurs and discovered 73% did not get the exact deal they made on TV. But tweaked terms or dead deals don’t necessarily spell doom for a business; for many contestants, just the publicity for appearing on the show ended-up being worth more than the deal…

About 43% of participates interviewed said their deals didn’t come to fruition after the show. They attributed this to sharks pulling out of the agreement or changing terms to ones that didn’t work for them. Others canceled deals after getting term sheets that included unappealing clauses… Another 30% of participates interviewed said the equity and investment amount offered on-air changed after taping, but they chose to take the deal anyway. They said that the changes often occur during negotiations or in due diligence– investigations into a participate or their business before signing a contract… The goal of entrepreneurs going on Shark Tank is to make a deal, but if it falls apart it’s not always a tragedy. About 87% interviewed that didn’t get deals are still operating, and the others either; closed, acquired, sold…

In the article Leadership Lessons from the Shark Tank by Executive Forum writes: Whether you’re an aspiring entrepreneur or a leader in the corporate world, there is so much to learn about leadership from the Shark Tank:

  • Have vision: Sharks receive pitches all day, every day. Sometimes they invest in a product but more often than not, they invest in a vision. They’re not interested in the short-term win of selling a million widgets, they’re looking for the opportunity to dominate a new market, revolutionize a process, change the world… They want to see the vision beyond immediate strategy. Vision must come first, and a mature organization is no different. Yes, a new product or service might help you hit your numbers, but what’s the vision for where the organization is headed by 2020? When the right vision is in place, strategy will follow…
  • Know numbers: No matter how cute, flashy, or funny the pitch, if you don’t know the numbers, you won’t get a deal. At least once per Shark Tank episode, someone enters the tank with a decent idea but with no financial acumen to turn that idea into a profit. How did you arrive at your valuation? What does it sell for? What is the cost to produce? How big is the market? What is customer acquisition cost? These would seem like basic questions that any entrepreneur seeking investments would have prepped, but they don’t. Do the homework and be ready with answers that inspire confidence…
  • Read body language: Keeping an eye on which shark(s) is leaning forward, who just crossed their legs, who is taking notes, and who is nodding or tilted their head to the side… that can make all the difference. In the game of boardroom poker, these can be ‘telling’ signs that you need to not only pay attention to, but use to adjust your presentation…
  • Be all-in: The sharks rarely invest in part-time entrepreneurs. The sharks always say that if you don’t believe in the product enough to take a full-time leap of faith, then they shouldn’t either. Hence, no one wants a part-time leader either; so if employees think that you are not fully committed to the vision of the organization, then they won’t either…
  • Show passion: Passion is contagious. While numbers and proven track record are important they are not the only influencing factors. Time after time, sharks invest in a person rather than a product. They invest in a person because they believe that with passion and drive, and even if the product itself fails, the person is worth the investment. They’re willing to take a risk just to see where that person can take them in the future… Hence, a truly inspiring leader can do the same thing. Employees will follow a leader who has– vision, passion, energy… because they believe that they can create an exciting future…

In the article Shark Tank Teaches About Negotiation by Jerry Jao writes: Sharks mostly ask thoughtful questions so as to challenge an entrepreneur to think about their business beyond the scope that they have already defined… During negotiations sharks are looking for how an entrepreneur thinks, their insight, willingness to think in new ways. Negotiation is key part of business; learn to judge value, make good decisions on the fly, know when/how to counter-offer…

Seeing people under pressure is what makes Shark Tank an exciting and educational show to watch. However as a professional, you’ve got to keep your cool… If you’re feeling the heat and think that taking the offer is the best decision, you’re probably wrong. Step back take a deep breath, then consider the offer(s) soberly… Ask: What’s wrong with it? What’s right with It? If there are red flags then think about possible alternatives, before turning it down… Business people who make rash decision under pressure never come out winners…

Appearing before an audience of millions while getting drilled by experts will force you to think on your feet… Business people who can’t plan on the fly while the heat is rising will drown… If you don’t like an offer make a counter-offer: You have nothing to lose. The saddest outcome that happens on Shark Tank is when entrepreneurs, passionately pitch ventures, but then turn down the offer(s) without countering…

 

 

 

Venture Capital Funding Model– Danger of Dying, Irrelevancy: VC Firms, As Asset Class, Have Utterly Failed…

The story of venture capital (VC) appears to be a compelling narrative of bold investments, excess returns… however, the reality looks very much different. Behind the anecdotes about– Apple, Facebook, Google… are numbers that show many more venture-backed start-ups fail than succeed… and VCs themselves are not much better at getting good returns… According to Fred Wilson; biggest issue is simply too much money– billions of dollars continues to flow unabated into venture-backed companies but venture capital firms as an asset class have not outperformed other investments, e.g.; the stock market… since the early 90’s and will probably deteriorate further...

Things look even bleaker when you add in the additional billions that angel investors dish out, and growing interest from places like– Russia, Middle East, China… and rise of accelerator programs like; YCombinator, TechStars… and financing options like; Kickstarter, crowdfunding… According to Kaufman Report; many  institutional investors continue to pour money into these funds despite VC’s abysmal track record… The traditional venture capital landscape is shifting and VC’s must begin to rethink their business models and herd mentality that dominates the industry…

In the article How do Venture Capitalists Make Money? by Draper writes: Venture Capitalists are money managers, they raise money and manage it for other people who are the ‘limited partners’… The normal venture capital (VC) firm will raise on the–  ‘2 and 20’ terms. The ‘2’ is in reference to the management fee, which means every year, 2% of the funds raised go toward operations of the firm… So if a VC raised $10,000,000 fund, the fund would have an annual operating budget of $200,000 for life of the fund (generally 10 years). The ’20’ is in reference to ‘carried’ interest… VCs make most money off of the ‘carried’ interest rather than management fee…

This basically means that the venture firm gets 20% of the upside after they have returned the money being managed… Which is why venture capital is built on moon shots and not safe bets. Safe bets might give you 3–5x return over 7 years, but something like Google, could give you 10,000x… These are the normal numbers that many funds use, but every venture firm is different, In summary, VC firms are  paid in two ways:

  • Management fees: 2%/year of funds under management is common; over the ~10 year life of a fund, that’s ~20% of the capital…
  • Carried interest: This is a share of the profits on the fund before the money is returned to investors. The typical number here is 20%…


In the article End of the Management Fee in Venture Capital by Paul Grossinger writes: The ‘management’ fee is going the way of the landline for all but a handful of top-notch VC firms… Since the advent of traditional early stage venture capital in the 1980s, the industry has been dominated by a dual-compensation model; a management fee, to pay for running the firm over its lifetime, and a profit ‘carry’, to give upside to the partners… However, a new crop of investors are seeking to end the dual-compensation model… and reduce or end use of management fees and instead rely only on profit ‘carry’…

This charge is certainly not absolute or applicable in 100% of cases. Many traditional venture capital funds have strong, long track records and have produced excellent returns and the earned right to continue operating under whatever model they see fit. But majority of funds under management do not have such sterling returns. In fact, more than half of traditionally structured VC funds actually lose money. Contrast that with the ‘returns’ of active angel investors, individuals, which are much higher…

In the article Venture Capital Salary & Compensation by WSO writes: Successful venture capitalists can make a very nice living with less risk, and less chance of burnout than entrepreneurs… From analysts and associates to managing directors, venture capital salary is traditionally heavily weighted toward the bonus portion of the compensation, as well as ‘carry’… Much like private equity, venture capital compensation has a broad range but it’s usually a function of the fund’s performance, and much of compensation is tied up in ‘carry’, which can be rather large payout… According to Wall Street Oasis; rough VC compensation ranges based on user registration data is shown as follows:

  • Analyst: $80K – $150K.
  • Associate: $130K – $250K.
  • Vice Presidents: $200K – $250K + $0-1MM ‘carry’ bonus.
  • Principal/Junior MD: $500K – $700K + $1-2 MM ‘carry’ bonus.
  • Managing Directors/Partners: $1MM + $3-9MM ‘carry’ bonus.

In the article Venture Capital Is Dead. Long Live Venture Capital by Erik Rannala writes: There are rumblings that the traditional VC business model could be in danger of extinction, threatened by more contemporary investment sources such as; crowdfunding, super angels… While it’s true that the early-stage funding landscape is changing, VCs are hardly on the demise, nor are professional VCs losing ground to– crowdfunding, angels… Rather than looking at the funding landscape as a zero-sum game with one model rising up at the expense of another, it’s best viewed more as a continuum, with investors across the spectrum matching up with companies at the right stage of development or maturity…

Venture capital as an asset class has utterly failed and some suggest more than 1/3 of about 790 venture capital firms have turned into living dead… However, the venture capital lobbying organization (the NVCA) feverishly attempts to dampen the demise of the reputation of venture capital by quoting nebulous IRR (Internal Rate of Return) statistics that often hide the fact that relevant absolute performance comes from just a small number of firms…  According to Georges Van Hoegaerden; venture capital in its current form and deployment is by economic principle incompatible with finding the outliers of innovation…

It’s ironic, VC firms position themselves as supporters, financiers, and even instigators of innovation, yet the industry itself has been devoid of innovation for the past 20 years. Venture capital has seen plenty of changes over time– more funds, more money, bigger funds, declining returns but VC firms have not changed– they are structured, capital is raised, partners are paid… just as they were two decades ago. The VC industry that purports to be the promoters of innovation are, in fact, being out innovated from outside their own industry…

Crowdfunding or Crowdfrauding: The Real Winners– Entrepenueurs, Startups, Small Business…, or Accountants, Lawyers, Consultants…

Crowdfunding is an emerging way of funding; startups, new ideas, projects… by borrowing funding from a crowd (many people), e.g., family, friends, fans, connections….

Crowdfunding is the collective practice of people using the Internet to network and pool their money for a variety of purposes, including funding an early-stage company. Another aspect of crowdfunding is tied into the ‘Jumpstart Our Business Startups’ (JOBS) Act which allows for a wider pool of smaller investors with fewer regulatory restrictions.

The Act was signed into law on April 5, 2012, and the Securities and Exchange Commission (SEC) has approximately 270 days from the enactment date to set forth specific rules and methods to ensure that funding actually take place. The JOBS Act adds a new equity crowdfunding exemption to the registration requirements of the Federal securities law. In other words, follow the rules and regulations that the SEC and other regulatory agencies hand down, then you will be able to use the Internet to raise money for your company.

Crowdfunding allows; startups, ideas, projects… which do not fit the conventional venture investment pattern to attract funding through the participation of a crowd– you need a crowd (many people) to participate, e.g., family, friends, fans... According to the ‘Daily Crowdsource’; crowdfunding has gone from $32 million market to $123 million market in the past two years. In 2011, crowdfunded businesses and projects raised $102 million on rewards-based platforms, including $85.4 million raised by projects that reached their total funding goal… this signifies 266% increase in the total amount donated and 263% increase in the amount donated to projects that received their full funding.

This explosion is attributed to the increase in the number of projects that are being posted online. More than 31,000 projects sought crowdfunded donations in 2011, up from just under 12,000 in 2010. The ‘Daily Crowdsource’ report says; not only are more projects being launched, but the number of projects achieving their full funding goal is also increasing, indicating the market is becoming more efficient at allocating resources…

In the article “Crowdfunding: What it Means for Investors” by Bill Clark writes: The crowdfunding feature of the JOBS Act will not only impact startups, it will also affect investors. That’s because the law allows almost anyone to invest in a startup, however, there is one catch: In the amended Senate bill, the SEC has 270 days to interpret and issue the rules for the public. That means potential investors may have to wait until 2013 before it’s legal to make an investment.  In about 90 days the ‘Access to Capital for Jobs Creators Act’ should go into effect, allowing companies to tell the public that they are raising capital.

In the past, this type of solicitation was illegal and could exempt the company from raising money privately. Now, startups will be able to solicit their deal, which could mean that more investors will hear about it.  The caveat is that only accredited investors can participate in those deals where the company is soliciting. In other words, this will only apply to investors who fall into the following categories.

  • Your net worth is more than $1 million, excluding your home.
  • You have $200,000 in new income for the last two years and reasonable expectation to make $200,000 in the current year.
  • You have $300,000 in household income for the last two years and reasonable expectation to make $300,000 in the current year.

If you don’t fall into these brackets, then you have several options: 1. Review campaigns on crowdfunding platforms, such as; Kickstarter, Indiegogo, Rockethub… Here, while you can’t make an actual investment in company, you will get something for your contribution. For example, if you invest in a video game you might get a copy of the game. 2. You can sign-up on a startup listing platform, e.g., Angellist, where you can check out startups for potential investment. Or, if you choose to wait until 2013, then as a new investor you will need to fill out a suitability questionnaire which will ensure that you understand the risks associated with investing…

A recent ‘Crowdfunding Industry’ report reveals incredible potential for equity-based crowdfunding, saying: ‘After collecting data from more than 170 crowdfunding platforms (CFPs) and other sources, the results revealed that CFPs raised almost $1.5 billion and successfully funded more than one million campaigns in 2011.

As of April 2012, there were 452 crowdfunding platforms active worldwide; and there will be more than 530 projects by the end of 2012′. The report also found that the crowdfunding market is growing at the rate 63% CAGR (compounded annual growth rate) for total amount funds raised. The report identifies four categories of crowdfunding platforms:

  • Equity-based (for financial return): Platforms grew 114% CAGR, primarily in Europe, and raised largest sums of funds per campaign; over 80% raised $25,000+.
  • Donation-based (motivated by philanthropic or sponsorship incentive): Platforms raised the most funds at $676M, but the slowest-growing at 43% CAGR.
  • Lending-based (P2P, P2B, and social): Platforms represent the second largest category raising $552M, and grew at 78% CAGR faster than donation-based.
  • Reward-based (for non-monetary rewards): Platforms  show very high growth at 524% CAGR, but from a low base of about $1.6M  in 2009.

Surprisingly, it’s the reward-based model that currently accounts for the most amount of money in the crowdfunding industry (79%) at the moment (probably due in large part to Kickstarter’s model for success). Lending-based is currently the category with the smallest share, but that may change with the new crowdfunding bill. One determining factor in the growth of equity-based crowdfunding will be the ability for CFP’s to successfully satisfy SEC rules and become registered, then equity-based crowdfunding offerings are expected to rise exponentially.

Another highlight of report concerned the rate at which fundraising takes place. The popular theory is; the first 25% of funds take longer to rise than the last 25%. However, according to ‘crowdsourcing.org’, it takes approximately 2.84 weeks to raise the first 25%, then 3.18 weeks to raise the last 25%, on average. The lending-based take less time than equity-based or donation-based campaigns. These figures could be important when considering crowdfunding strategies.

In the article Before You Crowdfund, Read This by Mark J. Mihanovic writes: The JOBS Act legislation is sweeping in nature, and it contains various provisions crafted to ease capital raising for privately held companies. The provision that has generated perhaps the most buzz is a new securities exemption that allows companies to raise up to $1,000,000 per year from large numbers of investors through funding portals.

This allows companies  using crowdfund equity financing to greatly expand potential sources of capital. However, crowdfunding comes with some potential pitfalls. So if you are an entrepreneur forming a startup, you will want to map out your near-term and long-term financing strategies before you decide whether to go the more traditional route of friends-family, VC financing, crowdfunding. Here are a few points to keep in mind:

  • The crowdfunding provisions of the JOBS Act legislation include various requirements and complexities that your early-stage company must adhere to, including (a) specified disclosure obligations, (b) rules regarding which funding portals and brokers you can use in crowdfunding financings and (c) per-investor caps on investment amounts, which could prove difficult to navigate. The SEC will announce its regulations within the next several months, and that could have a significant impact on the utility of the crowdfunding option.
  • It could cost you significant time and expense to do the administrative work associated with record-keeping and potential contractual arrangements with large numbers of stockholders. Further, a greater number of stockholders could translate into a greater number of disgruntled stockholders, further translating to more potential stockholder lawsuits. This in turn could lead to, among  other bad things, higher directors liability insurance costs.
  • It might be difficult to obtain venture capital once you have taken a round of crowdfunding, so it’s likely crowdfunding will become an alternative route, rather than a stepping-stone to venture capital financing. In short, if you are considering near-term crowdfunding, be aware that the transaction might foreclose venture capital investment down the road.

In the articleCrowdfunding Mistakes that Can Kill a Campaign by Scott Steinberg writes: The biggest misconception people have about crowdfunding sites is that once they post their project up, things will fall into their laps with little effort. That is not true folks. ‘All growth depends upon activity. There is no development physically or intellectually without effort, and effort means work’.

Here are some fun facts that will help you reach success; 75% of crowdfunding projects use well crafted video to help gain more support, 65% posting users shoot video themselves, and 80% users share post on their Facebook, Twitter, personal blog and other media outlets that will help raise awareness.

Projects with clever and enticing giveaways have 70% higher success rate, and if blogs or large publications pick’s up your post, the project will experience significant boost. There are many ways to success; it just depends on what steps you take, hard work, and a lot of  marketing…

Business startup activity is at its lowest point on record– a point worth paying attention to since, historically, startups have created an average 3 million jobs annually, while existing firms lose 1 million jobs each year. As a ‘Kauffman Foundation’ report puts it: Startups aren’t everything when it comes to job growth. They’re the only thing.

According to the ‘Silicon Valley Watcher’, the latest report on trends in U.S. venture investments shows a massive decline of 40% in seed investments in U.S. startups in the final quarter of 2011, and a much larger drop of 48% for the entire year.  According to Dane Stangler; the U.S. badly needs to encourage a ‘producer’ economy– in which more people create companies and entrepreneurial opportunities– instead of the current ‘consumption economy’.

Proponents of the crowdfunding say that it will increase startup activity, whereas, critics argue that it will create– or exacerbate– a kind of speculative attitude. Also, the concern that lowering the barriers for entrepreneurs… to raise money will also make it easier for fraud artists… to take advantage of individual investors.

For many companies (in particular, those unable to get venture capital whether due to size, business sector, or geography), crowdfunding will make a great deal of sense… although, it’s highly unlikely that crowdfunding will change the game plan for companies that would otherwise be able to secure venture capital financing.

Crowdfunding might just be the answer that will allow for a consistent flow of funds for startups… but, until SEC releases regulations it’s anyone’s guess on the potential impact. In the meantime, a prudent approach for startups, entrepreneurs… and investors, alike, is to sit back and wait until we get a bit more clarity.

The crowdfunding alternative is new, evolving and subject to the securities laws and related liability. As such, you will probably need advisors– accountants, lawyers… to help navigate the regulations, disclosures and ongoing compliance.

Private Equity– Changing Face of Capitalism: Dark- & Bright-Side of the World Financial Markets…

“Private equity is becoming a life-stage for CEO’s. It’s something we’ve never seen before. Perhaps the lesson to remember best is this: the Private Equity world is now attracting the ‘best and brightest’ of the corporate world…” ~Jeffrey A. Sonenfeld

Private equity firms have been castigated as “smash and grab merchants”, “deal flippers”, and criticize severely as “locusts that fall on companies and stripping them before moving on.” They have been accused of misleading promises, dodging tax and threatening social stability. Yet they are the emerging giants of the financial world, an alternative asset class that is increasingly attracting investor interest. Consider these facts:

  • The biggest five private equity deals together are larger than the annual budgets of all but 16 of the world’s largest nations. The five biggest deals involved more money than the annual budgets of Russia and India.
  • The annual revenue of the largest private equity firms and their portfolio companies would give private equity four of the top 25 spots in the Fortune 500. These firms have more annual revenue than companies, such as, Bank of America, JP Morgan Chase, and Berkshire Hathaway.
  • The top 20 private equity firms alone control companies that employ nearly 4 million workers.

Private equity investments are primarily made by private equity firms, venture capital firms, or angel investors, each with their own set of goals, preferences, and investment strategies, yet each providing working capital to target companies to nurture expansion, new product development, or restructuring of the companies’ operations, management, or ownership.

Among the most common investment strategies in private equity are: leveraged buyout (LBO), venture capital (VC), growth capital, distressed investments and mezzanine capital. Private equity is risk capital invested in businesses that aren’t listed on public-stock exchanges, or won’t be after they’ve been taken over, and de-listed. It’s also a shorthand term for firms that specialize in raising capital for new enterprises, financing management buyouts, and restructuring companies to realize the full value of their assets.

Over $90 billion of private equity was invested globally in 2009, a significant fall from the $181 billion invested in the previous year. The 2009 total was more than 70% down from record levels seen in 2007. Deal making however gathered momentum during the year with larger deals announced towards the end of 2009. With bank lending in short supply, the average cost of debt financing was up and private equity firms were forced to contribute a bigger proportion of equity into their deals.

Private equity funds under management totalled $2.5 trillion at the end of 2009. Funds available for investments totalled 40% of overall assets under management or some $1 trillion, a result of high ‘fund raising’ volumes between 2006 and 2008. Funds raised fell by two-thirds in 2009 to $150 billion, the lowest annual amount raised since 2004.

The difficult ‘fund raising’ conditions have continued into 2010 with half-yearly figures showing a total of $70 billion raised in the first six months, slightly below the same period in 2009. The average time taken for funds to achieve a final close more than doubled between 2004 and 2010 to almost 20 months and in some cases the final amounts raised were below original targets.

Prior to the economic slowdown, the market saw intense competition for private equity financing. The three years leading-up to 2009 saw an unprecedented amount of activity, during which more than $1.4 trillion in funds were raised.

In the article A Primer on the Structure of Private Equity Firms” by Michael Gasparro writes: The private equity firm is typically made up of limited partners (LPs) and general partners (GPs). The LPs are the outside investors. They provide the capital and typically consist of institutional investors such as insurance companies, endowment funds (Harvard, Stanford, Princeton, Yale, and other universities invest endowment funds in private equity), foundations, banks, retirement/ pension funds, family investment offices, as well as, high net-worth individuals.

They are called limited partners in the sense that their liability extends only to the capital they contribute. Generally, the minimum commitment for an LP is $1 million. The agreement between LPs and GPs will typically include contractual provisions which specify what private equity firm can and cannot do. Broadly speaking, provisions will be placed around the management of the fund, the activities of the GPs and the types of investments the GPs can make…

In the articlePrivate Equity Insights You Need To Know” by Tom Johansmeyer writes: ‘Global private equity deal flow has witnessed a resurgence during 2010 as a whole, with deal flow globally this year representing the strongest year for private equity deals since the onset of the global financial crisis. ‘In particular, this year has been notable for a surge in both North American and European deals, with North American deal flow in 2010 more than double that witnessed during 2009, and European deal flow in 2010 almost three times the value of deals seen in the region in 2009.’ According to the Preqin’s statistics:

  • There were 265 exits in the fourth quarter of 2010, amounting to $71.8 billion – this is the highest quarterly figure on record.
  • In full-year 2010, $204.9 billion worth of buyout deals was announced, more than doubling the 2009 total value announced.
  • Deal flow in 2010 increased 130 percent from 2009 and 35 percent from 2008 in North America.
  • Deal flow reached $68.1 billion in Europe last year, almost three times the $24.2 billion in announced private equity deal flow the year before.
  • In Asia and the rest of the world, announced private equity deal flow spiked 39 percent from the third quarter to the fourth quarter, with $8.6 billion in transactions announced.

In the article Private Equity and Strategic Buyers -Distinction Without Difference?” by Peter Lehrman writes: According to the ‘Pitchbook Data’s 2011 Private Equity Breakdown’ there were 5,994 private equity-backed portfolio companies at year-end 2010.

According to a recent survey ‘AxialMarket’ conducted, interviewing its private equity customers, 57% of the respondents indicated that their portfolio companies were actively looking to grow through acquisitions, while over 80% of the respondents indicated that their portfolio companies would opportunistically review  acquisition  opportunities. Why does this information matter to business owners?

Because the most likely strategic buyer for your business ironically might well be a private equity firm instead of a Fortune 2000 corporation.  What business owners and to a lesser extent M&A Advisors appear to under-appreciate is how significant the private equity community has become as its own strategic buyer category. In addition to having over $400 billion of committed but un-deployed capital that must be deployed in the coming years, private equity firms collectively own almost 6,000 private companies.

In the articleWill Dodd-Frank Forever Change Private Equity?” by Kareem G. Nakshbendi and Averell H. Sutton write: The ‘Dodd–Frank Wall Street Reform and Consumer Protection Act’ brings ‘private equity funds’ under the auspices of the Securities and Exchange Commission. Any entity that has assets of at least $150 million is subject to record keeping and disclosure requirements pursuant to the SEC and Commodity Futures Trading Commission (CFTC).

However to work-around the provision of the bill, funds simply make smaller deals: A firm can create different fund structures to have multiple funds that have no more than $125 million each and do not have similar ownership structures in order to evade Dodd-Frank. Venture capital funds are exempt from Dodd-Frank. The bill creates a level of transparency that has not been seen before in private equity.

One of the attractive things about private equity deals is that the public is not at risk and therefore has no reason to know the details of a deal arrangement. Private equity’s real currency is its unique access to information and clients, and the opportunity to make big gains for the risks taken…

“The best-performing companies are those where the private equity investors are: Bought into the right company at the right time; Backed strong management from the outset; Focused on delivering sustained improvements”. “The key to a successful private equity is thorough preparation”.  ~ Ernst & Young

The private equity world is a very freewheeling world. It is entrepreneurial, competitive, hard-driving, and unforgiving, in part because it is both numbers-oriented and short-term. Private equity is not necessarily a confusing topic, but it can be highly complex. Private equity firms typically seek to re-energize businesses by refocusing, restructuring, reinvigorating – and then sell them on a short-term horizon, generally 3 to 5 years.

While these firms commonly take a management fee of 1.5% to 2% off the top each year, their primary goal is the eventual payoff: 15% to 20% of profits upon sale or public offering. Their business emphasis is not on operating businesses for a profit, or even building businesses over the long haul, but on buying-and-selling businesses for a profit. With the bursting of the credit bubble the private equity industry was badly affected: In research,

Boston Consulting Group estimates that at least 50% of the private equity deals done in the recent past will default on their debt. The liquidity crunch has changed the availability of cheap debt, and approximately half the firms need to raise capital for new funds.

As a result, private equity firms will shrink dramatically and only the best firms will survive the new financial environment. However, in the long-term, it is highly likely that a more vibrant industry will reemerge…

“Investors need to be aware that most of the publicly-available data on private equity returns are usually wrong – and often grossly misleading.” ~Michael Moritz