Best Practices by Private Equity Funds in Deal Origination
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Best Practices by Private Equity Funds in Deal Origination

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Best Practices by Private Equity Funds in Deal Origination

Best Practices by Private Equity Funds in Deal Origination

by David Teten

How to Find Great Investments in Private Companies

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  • David, have you done any updates to this study / presentation since 2008? Would love to see if so.

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Best Practices by Private Equity Funds in Deal Origination Best Practices by Private Equity Funds in Deal Origination Presentation Transcript

  • Where Are the Deals?!Best Practices of Private Equity Fundsin Originating InvestmentsDavid TetenPartner, ff Venture Capitalffvc.comblog: teten.comNew York, NYinfo@teten.com , @dtetenJuly 12, 2011 “Cold Calling?” from http://www.flickr.com/photos/23439761@N03/3258313816/sizes/l/
  • Intro Org Chart Tradition Social Signals Network Next Steps We have presented our research to many investor conferences, private equity funds, and investment banks. •  Association for Corporate Growth (ACG) Intergrowth, and Capital Connection Chicago •  Alliance of Merger & Acquisition Advisors •  CFA Society of Los Angeles •  Columbia Business School Alumni Club of New York •  Financial Executives Networking Group •  Golden Seeds (US angel group) •  Harvard Business School Club of London •  Harvard Business School Association of Southern California •  Kauffman Fellows program participants •  Keiretsu Forum •  Wharton Alumni Club of Northern California •  Yale Club of Singapore •  Singapore Venture Capital and Private Equity Association •  CFA Singapore •  Women’s Association of Venture & Equity •  Leading investment banks, private equity funds, venture capitalist funds, and hedge funds© 2011 David Teten. More at teten.com.
  • Intro Org Chart Tradition Social Signals Network Next Steps Background David Teten recently completed the first-ever research project on “Best Practices in Private Equity and Venture Capital Deal Origination”. His coauthor for some of the research is Chris Farmer, Venture Partner, General Catalyst, and formerly Vice President, Bessemer Venture Partners. David and Chris have published their findings in the Journal of Private Equity (Winter 2010); Mergers & Acquisitions (December 2010); Institutional Investor (October 2010); and Harvard Business Review (June 2010). These slides provide some of the learnings and underlying data from the research study. Evalueserve, a global research firm and the acquirer of David’s former company (Circle of Experts), provided supporting research and analytics in the initial phases of this study. We also thank Yujin Chung (Andreessen Horowitz) and Neha Kumar (Anklesaria Group), our research associates who provided invaluable support, and interns Corentin Roux dit Buisson, Dan Clark, Nitin Gupta, and Nikhil Iyer .© 2011 David Teten. More at teten.com.
  • Intro Org Chart Tradition Social Signals Network Next Steps David Teten Biography (teten.com) •  Partner, ff Venture Capital, early-stage technology venture capital fund. Over 150 investments in over 55 companies. •  Founder and Chairman, Harvard Business School Alumni Angels of Greater New York •  Founder and Chairman, Navon Partners, startup focused on sourcing deals for private equity funds •  Managing Director, Evalueserve, through September 2008. 2,500-person finance-focused research and analytics firm. •  Founder and CEO, Circle of Experts (investment research firm), sold to Evalueserve •  Founder and CEO, Teten Executive Recruiting, sold to Accolo, #42 on 2007 Inc. 500 •  Founder and CEO, GoldNames, domain name investment bank, based in Israel •  Technology/Defense Investment Banking, Bear Stearns (#1 group at Bear investment banking by revenues) •  Lead author, The Virtual Handshake: Opening Doors and Closing Deals Online (TheVirtualHandshake.com) •  Harvard MBA 1998, Yale BA, both with honors. •  Contact: info@teten.com© 2011 David Teten. More at teten.com.
  • Intro Org Chart Tradition Social Signals Network Next Steps Agenda •  Introduction •  Organizational Structure •  Traditional Deal Origination •  Social Media •  Signals of a Potential Investment •  Growing Your Corporate Network •  Next Steps© 2011 David Teten. More at teten.com.
  • Intro Org Chart Tradition Social Signals Network Next Steps Navon Partners (NavonPartners.com) We help investors to identify investment opportunities in illiquid assets. We obtain our data from: •  major data vendors; •  licensing from niche data vendors; •  non-traditional sources, e.g., web scraping from the ‘dark web’; and •  our data-based financial extrapolation, e.g., estimating revenues based on headcount. Our initial target market is helping private equity funds to identify proprietary deals which are predictably attractive long-term investments. Our rigorous, data-driven algorithmic process is modeled on the datasets and process used by quantitative hedge funds.© 2011 David Teten. More at teten.com.
  • Intro Org Chart Tradition Social Signals Network Next Steps We interviewed over 150 private equity and venture capital funds globally for this study. Analysis of Private Equity and Venture Capital Funds in Study© 2011 David Teten. More at teten.com. David Teten, Chris Farmer, Evalueserve, Yujin Chung, Neha Kumar
  • Intro Org Chart Tradition Social Signals Network Next Steps Firms in venture centers (Boston/NY/Silicon Valley) outperform with investments outside venture centers. Performance gap is larger for late stage (20.7% vs. 15.7%) vs. early stage (15.1% vs. 11.3%)*. Leading Late-Stage Tech Investors Portfolio by Geography, 2000-1Q2010 Minimal outbound origination programs targeted Origination programs targeted outside of outside of Venture Centers Venture Centers These funds are typically top-quartile performers; almost all have raised funds equal or larger than their preceding fund in the challenging 2007-10 period. Success rate shown is defined as % of VC portfolio which leads to IPO. Results are similar when success is defined as investment either leading to IPO or acquisition.© 2011 David Teten. More at teten.com.sectors. Battery & Sequoia data is only late stage/growth equity deals. *“Buy Local? The Geography of Successful and Unsuccessful VC Expansion”, Chen,Gompers,Kovner,Lerner Only IT & related
  • Intro Org Chart Tradition Social Signals Network Next Steps Case study: Castle Harlan, $3b PE fund, studied correlation between different sourcing strategies and returns. •  Castle Harlan completed an internal study in 2009 of the sources and returns of all their completed transactions (68 deals, 38 exited). •  Firm management asked the deal team on each transaction to rate the importance of seven proprietary strategies to winning each deal, on a scale of 0-10 (10=maximum). •  For example, "finder" and "industry expertise" were two of the strategies. "Finder" was score-weighted in a binary way, with either a 0 for no finder involved or a 10 for a finder playing a key role in sourcing the transaction. •  Across all deals, the mean total "proprietariness" score was 21.2 out of a maximum possible of 70, and 44 of the deals (65%) scored above 25. Most of these 44 deals fully exploited (i.e., 10 out of 10) at least two proprietary strategies, and benefited from some other strategies as well.© 2011 David Teten. More at teten.com. Castle Harlan
  • Intro Org Chart Tradition Social Signals Network Next Steps Castle Harlan origination study shows higher multiples for proprietary deals. •  The most proprietary deals (“proprietariness” scores of 31+) had a somewhat higher return than non-proprietary deals, while at the same time the firm tended to pay on average a premium for these proprietary deals. • Includes: Deals sourced through affiliated investors; through relationships with current management; and/or through relationships with non-incumbent management. • This implies that these companies were higher quality than non-proprietary deals; Castle Harlan perceived a lower uncertainty risk; and/or the fund was able to add more value to these transactions after a transaction closed. •  By contrast, deals characterized as being sourced through finders were associated with lower entry multiples, but also relatively less attractive realized outcomes. • Only 9 investments (13% of the total) had a "Finder" score of 5 or more.© 2011 David Teten. More at teten.com. Castle Harlan
  • Intro Org Chart Tradition Social Signals Network Next Steps Closing one deal requires sourcing 80-100 deals. Investment Search Process (# Companies) Angel groups First Round Blackford Highland Acquirer/ using Angelsoft Capital Capital TA Associates Capital AlliedSignal Investor (2010)[i] (2009)[ii] (2009) (2006)[iii] (2008)[iv] (1996-97)[v] Investing focus startups startups lower-middle- growth growth synergistic market companies companies businesses Profiled initially 20,850 2,500 1,394 NA NA 550 Target Selected 1,315 500 261 8,000 10,000 [vi] 190 Met 1,047 NA 20 750 1,000 NA Negotiated with NA NA 14 NA NA 28 Detailed due 577 100 20 NA NA 17 diligence Acquired/ 541 20 3 10 to 12 10-20 10 invested Deals as % 33.5% 4.0% 1.1% 0.1%-0.2% 0.1%-0.2% 5.3% targeted (2.1% of companies submissions) [i] Available at http://angelsoft.net/a/venture-valuation , as of twelve months ending March 17, 2010. [ii] Aktihanoglu , Murat. “NYC Entrepreneur Week Events Take-aways.” May 3, 2009. http://centrl.com/blog/?p=53 . [iii] Rudd, Amber. “A Kind of Magic.” Corporate Financier, October 2006. [iv] Economist, Global Heroes: A Report on Entrepreneurship, March 14, 2009., p. 9. “Targets selected” figure indicates number of business plans received. [v] Bruner, Robert F., Applied Mergers and Acquisitions. New York: John Wiley & Sons, 2004., p. 183.© 2011 David Teten. More at teten.com. [vi] Number of business plans received.
  • Intro Org Chart Tradition Social Signals Network Next StepsVCs have to filter 9% more deals than PE funds to close one deal. Median Pipeline Size Necessary to Close One Deal© 2011 David Teten. More at teten.com. David Teten, Chris Farmer, Evalueserve, Yujin Chung, Neha Kumar
  • Intro Org Chart Tradition Social Signals Network Next Steps Three investment professionals need 1 year to close 1 deal. Median Annual Pipeline Size per One Investment Professional© 2011 David Teten. More at teten.com. David Teten, Chris Farmer, Evalueserve, Yujin Chung, Neha Kumar
  • Intro Org Chart Tradition Social Signals Network Next Steps Agenda •  Introduction •  Organizational Structure •  Traditional Deal Origination •  Social Media •  Signals of a Potential Investment •  Growing Your Corporate Network •  Next Steps© 2011 David Teten. More at teten.com.
  • Intro Org Chart Tradition Social Signals Network Next Steps The most common sourcing strategy is to combine in-house/ direct with sell-side intermediary. 40% of firms plan to move towards more in-house/direct in next 3 years. Deal Sourcing Strategies: Please describe if your sourcing strategy has changed, how it has changed, and how you expect it to change in the next 3 years. In-House/ Buy-side Sell-side Direct Intermediary Intermediary Other 100% 90%-100% 90%-100% 90%-100% 30%-39% 30%-39% 90%-100% 50%-59% 50%-59% Less Less Percent of Respondents 40%-49% 80%-89% 80%-89% 80%-89% 40%-49% 80%-89% 20%-29% 70%-79% 30%-39% 30%-39% Less 20%-29% 70%-79% 70%-79% 60%-69% 80% 60%-69% 20%-29% 20%-29% 60%-69% 60%-69% 10%-19% 50%-59% 10%-19% 50%-59% 50%-59% 50%-59% Same 10%-19% 60% 10%-19% 40%-49% 40%-49% Same Same 40%-49% 40%-49% 30%-39% 30%-39% 30%-39% 30%-39% 40% 20%-29% Same 20%-29% 20%-29% <10% <10% 20%-29% <10% <10% 10%-19% 20% More 10%-19% 10%-19% 10%-19% More More <10% <10% <10% More <10% 0% 3 yrs ago Currently 3 yrs 3 yrs ago Currently 3 yrs 3 yrs ago Currently 3 yrs 3 yrs ago Currently 3 yrs from Now from Now from Now from Now * “Other” includes broken auctions, tangential relationships and well connected individuals. Parthenon Group© 2011 David Teten. More at teten.com.
  • Average Outsourcing %© 2011 David Teten. More at teten.com. 100% 20% 40% 60% 80% 0% Environmental Due Diligence 95% Intro Legal 93% Due Diligence Accounting 88% Due Diligence Tax 55% Preparation Org Chart Information 52% Technology Market 50% Due Diligence Legal/ Tradition 38% Compliance 30% Accounting 24% Marketing and Social communications 16% Human Resources 15% Financing Funds Signals 10% Administration Reporting Deal 10% Average Outsourcing Level by Function Sourcing Currently 5% Investor Network Relations Only 10% of deal origination is outsourced, on average. Office 2% Management 3 years from now Portfolio 2% Management Next StepsParthenon Group
  • Intro Org Chart Tradition Social Signals Network Next Steps Over 50% of funds plan to change/improve processes for sourcing, fundraising, and portfolio management. Percent of Private Equity Funds That Plan To Change/Improve Processes In The Next 3 Years Sourcing 55% Increased competition Fundraising 53% makes firms focus on these processes now Portfolio management 52% Due diligence 45% 80% believe these processes are important and already have 40% them in place Investment committee decisions Only 25% believe this Investment exit planning 37% process is important© 2011 David Teten. More at teten.com. Parthenon Group
  • Intro Org Chart Tradition Social Signals Network Next Steps An increasing percentage of fund employees are specialist originators. Investment Team Distribution by Job Function© 2011 David Teten. More at teten.com. David Teten, Chris Farmer, Evalueserve, Yujin Chung, Neha Kumar
  • Intro Org Chart Tradition Social Signals Network Next Steps Specialist originators are more common in more developed markets. % of Funds With At Least One Person Tasked Specifically and Primarily with Deal Origination David Teten, Chris Farmer, Evalueserve, Yujin Chung, Neha Kumar© 2011 David Teten. More at teten.com. Responses for Don’t Know/Cant say is excluded from the analysis. Percentages may not add up to 100 due to rounding off.
  • Intro Org Chart Tradition Social Signals Network Next Steps The best originators are aggressive, indefatigable, and personable. Attributes of Top Originators (descending order of importance) •  Persistence, or "hanging around the hoop" •  Personality •  Business judgment •  Adequate financial sophistication •  Seniority and appropriate title •  Internal power •  Creativity© 2011 David Teten. More at teten.com. http://www.flickr.com/photos/randysonofrobert/2552298739/
  • Intro Org Chart Tradition Social Signals Network Next Steps Agenda •  Introduction •  Organizational Structure •  Traditional Deal Origination •  Social Media •  Signals of a Potential Investment •  Growing Your Corporate Network •  Next Steps© 2011 David Teten. More at teten.com.
  • Intro Org Chart Tradition Social Signals Network Next Steps Intermediaries refer deals to funds primarily in the hopes of future revenues. Top Reasons Intermediaries Refer Deals to Funds (descending order of importance) •  Possibility of future revenue •  Integrity •  High certainty to close •  Speed of response •  “Fair” treatment of sellers •  Experience with the industry or owner type •  Friendship •  Feedback •  Maintaining a single point of contact© 2011 David Teten. More at teten.com. http://www.flickr.com/photos/extranoise/3382930813/
  • Intro Org Chart Tradition Social Signals Network Next Steps Companies favor a particular investor for the same reasons as an intermediary (see prior page), plus a range of other factors. Top Reasons Companies Select a Given Investor (in descending order of importance) •  Economics •  Added Value •  Brand •  No extra costs, i.e., no portfolio company fees •  Fair treatment of employees post-transaction •  Long hold periods •  Investor location http://www.biztimes.com/news/2007/8/3/choose-the-right-private-equity-firm,© 2011 David Teten. More at teten.com. http://www.growthbusiness.co.uk/news/fundraising-deals/27442/part_2/private-equity-finding-a-match.thtml , http://www.flickr.com/photos/billselak/461062697/
  • Intro Org Chart Tradition Social Signals Network Next Steps Warm – Lukewarm – Ice The right type of specialization boosts returns. •  The rate of return of PE funds declines with diversification across financing stages… •  but increases with diversification across industries. •  Diversification across countries has no systematic effect on performance. •  In an Ernst & Young study of the largest PE deals of 2006, US investors reported that sector focus was an advantage in 2/3 of their deals, establishing credibility with management and helping to evaluate the growth potential of the target. •  In Europe, investors reported that sector focus was an advantage in 25% of deals. •  In both regions, these sector-focused deals performed above average. Lossen, Ulrich, “The Performance of Private Equity Funds: Does Diversification Matter?” Munich School of Management, Institute for Innovation Research, Technology Management and Entrepreneurship. June, 2006.© 2011 David Teten. More at teten.com. Ernst & Young. "How Do Private Equity Investors Create Value? A Study of 2006 Exits in the US and Western Europe". New York, NY/London. 2006.
  • Intro Org Chart Tradition Social Signals Network Next Steps Warm – Lukewarm – Ice Differentiation makes origination more efficient. Selected Highly Differentiated Investing Strategies Strategy Example(s) Co-investments with corporates Blackstone Group, Castle Harlan, Clayton Dubilier & Rice Executive-led transactions Frontenac Company, GTCR, Housatonic Partners Intellectual property Intellectual Ventures Spinning out processes from within Fortune 500 companies and setting Exigen Capital them up as independent ventures Deep focus from early to late stage in narrow vertical Andreessen Horowitz, Healthpoint Capital Minority-owned businesses AP Capital, ICV Capital Partners Women-owned businesses Hypatia Capital Family-owned businesses Heritage Partners Film financing Relativity Media Buying Western companies and outsourcing operations to China Crimson Ventures Distressed Searchlight Capital© 2011 David Teten. More at teten.com.
  • Intro Org Chart Tradition Social Signals Network Next Steps Warm – Lukewarm – Ice The best reason for deals to come to you is reputation. However, the bad news is: of 109 journalists surveyed, zero rated private equity firms “excellent” in communication. Journalists’ Evaluation of PE Funds’ Communication Skills Recommendations: •  Build personal relationships with journalists •  Have a clear point of view and area of expertise •  Develop and publicize quotable white papers and other thought leadership pieces© 2011 David Teten. More at teten.com. Haynes, Bill. “Making Media Count”. PrivateEquityOnline, April 7, 2009.
  • Intro Org Chart Tradition Social Signals Network Next Steps Warm – Lukewarm – Ice 30-50% of mid-market deals are typically club deals. Private Equity Club Deals as % of Total Number of Deals, by Deal Size (US)© 2011 David Teten. More at teten.com. Pitchbook.com data through May 2010
  • Intro Org Chart Tradition Social Signals Network Next Steps Warm – Lukewarm – Ice Private equity funds have a wide range of options in working with executives, many of which have no fixed cost. PE Fund Structural Options in Working with Operating Executives Operating Partner salary+carry Portfolio Company / NewCo Management salary+upside Fund Commitment Executive/Entrepreneur in Residence retainer+upside Senior Advisor / Deal Executive expenses+upside Free Agent expenses+upside Expert Network / Interim Executive hourly comp Rejected Executives© 2011 David Teten. More at teten.com. Executive’s Income
  • Intro Org Chart Tradition Social Signals Network Next Steps Warm – Lukewarm – Ice Senior Advisor networks offer a low-fixed-cost, high-return talent pool option. Senior Advisor Network vs. Traditional Talent Sources Experts and Consultants Senior Advisor Network Executive Recruitment Relationship Expert network / consultancy Fund Recruiting firm, then Owner handed over to fund Duration 1–2 hours to 3 months 6 months–2 years+ Permanent job and board positions Sample Service Gerson Lehrman, McKinsey, Navon Partners Heidrick & Struggles, Providers Evalueserve Russell Reynolds, Ignition Search Partners Illustrative Cost $1,000/hr for expert networks Sometimes retainer, 1/3 compensation $300–700/hr for consultants sometimes paid like investment banker Driver of Exec Length of consultation Value creation and Winning full-time Compensation continued involvement employment with client companies Confidentiality NDA possibly. Consultant may Signed, enforceable NDA NDA unusual “shop” ideas. based on table from Jon Weber, Anchorage Advisors LLC© 2011 David Teten. More at teten.com.
  • Intro Org Chart Tradition Social Signals Network Next Steps Warm – Lukewarm – Ice Partnering with operating executives is a successful strategy which is a focus for only a small number of funds. U.S. Funds That Typically Partner with Executives to Execute a Transaction and Bring in New Management Upon Investing AUM Cum. # # Deals/ Private Equity Fund Founded ($m) Investments Year (est.) GTCR 1980 $8,000 100 7 Wind Point Partners 1984 $2,000 80 5 Frontenac Company 1971 $875 200 5 Housatonic Partners 1997 $1,000 50 4 Prospect Partners 1998 $270 35 3 Red Diamond Capital 2002 $150 8 1 Post Capital Partners 2004 $100 7 1© 2011 David Teten. More at teten.com.firm websites. Frontenac AUM based on last two funds. # Investments/Year based on mean activity level over firm’s existence, with some adjustment for growth of fund over time. Data based on
  • Intro Org Chart Tradition Social Signals Network Next Steps Warm – Lukewarm – Ice We expect an increase in executive-led transactions in 2010-2025. Many motivated sellers •  Wave of baby boomers who must sell their businesses. >$10 trillion enterprise value of businesses to change hands in next 10 years. •  High pent-up demand to divest by corporates.* Highly inefficient and undercovered market •  Current players in Executive-Led Transactions niche small and financially unsophisticated. Easier to execute executive-led transactions •  Large pool of senior executives who are un/underemployed, some of whom want to be owner-operators with PE backing. These executives are difficult to reach through conventional means. •  Recent decision re: John Q. Hammons Hotels enables noncontrolling management to consummate MBO without searching judicial inquiry.** * PEP Digest, http://www.pepdigest.com/index.php?option=com_content&view=article&id=2990:better-deal-flow-in-2010-as-corporates-to-increase-divestitures&catid=34:news-to-know&Itemid=24© 2011 David Teten. More at teten.com. ** “Decision May Help Revive Management Buyouts”, Steven Davidoff, NY Times, http://dealbook.blogs.nytimes.com/2009/10/19/decision-may-help-revive-management-buyouts/
  • Intro Org Chart Tradition Social Signals Network Next Steps Warm – Lukewarm – Ice In-house relationships are the #1 source of transactions. Unsurprisingly, PE investors rely on intermediaries far more than VCs. Primary Sources of Investments Similarly, Ernst & Young found that ¾ of the largest PE investments in 2006 resulted from proactive deal origination strategies; only 11% of the deals resulted from PE investors starting work during the formal sale process. "Better preparation, strength of relationship with target management, and sector focus were the most important factors cited in winning a deal." David Teten, Chris Farmer, Evalueserve, Y. Chung, N. Kumar. Ernst & Young. "How Do Private Equity Investors Create Value? A Study of 2006 Exits in the US and Western Europe". NY/London. 2006© 2011 David Teten. More at teten.com.
  • Intro Org Chart Tradition Social Signals Network Next Steps Warm – Lukewarm – Ice Private equity funds use expert networks to originate deals in three main ways: •  Facilitate top-down, “rainmaker” sourcing strategies. Connect to senior industry executives. •  Support bottom-up, “boil the ocean” sourcing strategies. An investment team can exhaustively call experts to identify all the companies in a target sector or geography. •  Enable thematic sourcing strategies. Identify experts and consultants to help develop investment themes, map target markets, and engage market-leading firms.© 2011 David Teten. More at teten.com. Based on interview with Michael Duran, Gerson Lehrman Group, and other sources
  • Intro Org Chart Tradition Social Signals Network Next Steps Warm – Lukewarm – Ice Acquisition search firms are significant resources for private equity funds, but must be managed carefully. Advantages vs. Disadvantages of Acquisition Search Firms Advantages Disadvantages Value-Add Increased flow of deals Typically do not provide advice on valuation/ and investment structuring/negotiation, unlike a traditional opportunities investment banker Costs No fixed cost, other than Additional layer of costs (typically 1% to 2% of the (sometimes) retainer enterprise value) Focus Can be highly focused Can deluge a fund with inappropriate deals unless used in a focused way Database Large database in which Accused by some funds of exploiting the buyer’s to fish name to grow their own database Motivation Highly motivated Typically motivated only to close a deal, not by the quality of the deal© 2011 David Teten. More at teten.com.
  • Intro Org Chart Tradition Social Signals Network Next Steps Warm – Lukewarm – Ice We expect transaction volume and value in the secondaries market to increase. For unregistered securities in private companies, secondary transaction volume declined approximately 57% to $2.4 billion in 2009 vs. $5.7 billion in 2008. Where to Buy Secondaries •  Approach a fund directly, particularly one that is in distress. •  Look on the markets for secondary interests, such as SecondMarket, NYPPEX, and the PORTAL Alliance. •  Approach investment banks specializing in secondary interests, such as Cogent Partners, Probitas, and Triago.© 2011 David Teten. More at teten.com. NYPPEX Private Markets, "2009 Secondary Private Market Review and 2010 Outlook". New York, NY, January 8, 2010.
  • Intro Org Chart Tradition Social Signals Network Next Steps Warm – Lukewarm – Ice We recommend also using traditional marketing techniques. •  Use physical collateral. The best collateral has a long life, is creative, and has a tie to your funds’ model or portfolio. •  Choose targeted names. e.g., iFund, GreenTech (KPCB), FbFund, MailRoom Fund (Accel), and FTV Capital (FinTech) •  Leverage existing brands, e.g., recruit prominent leaders to your fund: Kleiner Perkins (Ray Lane and Al Gore), Maveron (Howard Schutz), and Polaris (Bob Metcalfe).© 2011 David Teten. More at teten.com. Westshore Capital Partners; Weinbach Group
  • Intro Org Chart Tradition Social Signals Network Next Steps Warm – Lukewarm – Ice Funds with cold-calling programs are consistently top-quartile performers. Key Steps for a Successful Cold Calling Program •  Focus on geographies/sectors that are undercovered by peer firms. •  Maintain clear criteria and metrics to ensure that the relationships being developed have a reasonable likelihood of yielding investments, and stick with them. •  Institute a formal CRM system, tied to a formal deal tracking program. •  Directly tie compensation to developing and maintaining the database; volume of flow; and quality of flow. •  Require regular follow-up with priority companies. •  Organize scheduled reviews with partners and sector teams. •  Maintain consistent dialogue with key prospects and sources. •  Use multiple outreach methods: phone, email, fax, overnight mail, etc., in order to get the attention of the person you’re targeting. http://www.flickr.com/photos/23439761@N03/3258313816/sizes/l/© 2011 David Teten. More at teten.com.
  • Intro Org Chart Tradition Social Signals Network Next Steps Warm – Lukewarm – Ice Market mapping is a powerful way to identify competitive white space. Sample Market Mapping Approach # Stage Example 1 Choose industries and geographies of initial interest Global growth equity fund with focus on North American and Japan. 2 Define your proprietary point of view. Thesis: Population in developed countries is aging rapidly. 3 Translate into investment theme for specific industries We expect growth of financial services providers with low-risk and/or geographies of interest. investing products. 4 List major players in target industries/geographies, Asset managers with expertise in annuities and fixed income and how each will be impacted by investment themes. products will likely benefit. 5 Iteratively improve market map based on feedback from Publish elements of the market map to key sector players industry through industry forums and mass media. 6 Determine which activities along the value chain offer Develop deep ties in the brokerage community that distribute the highest return (typically the proprietary ones). low risk financial products. 7 Identify areas of future growth. Fund researches bolt-on acquisitions while diligencing its primary target. 8 Assess fit with Fund’s strategy. Local geographic leader that would benefit from Fund’s global reach. 9 Regularly update the market map based on market Maintain internal wiki or database regularly updated with key feedback and lessons from investment prospects. market data and insights.© 2011 David Teten. More at teten.com.
  • Intro Org Chart Tradition Social Signals Network Next Steps Agenda •  Introduction •  Organizational Structure •  Traditional Deal Origination •  Social Media •  Signals of a Potential Investment •  Growing Your Corporate Network •  Next Steps© 2011 David Teten. More at teten.com.
  • Intro Org Chart Tradition Social Signals Network Next Steps Social Media Company Map “Social media is a communications medium that relies on its audience to create, modify, or distribute the medium’s content - Nick Gonzalez, SocialMedia.com© 2011 David Teten. More at teten.com. http://www.flickr.com/photos/briansolis/2735401175/sizes/l/, http://blog.socialmedia.com/how-should-we-define-social-media/. /
  • Intro Org Chart Tradition Social Signals Network Next Steps Social media technologies are pertinent throughout the investing cycle. How Investors Are Using Social Media Investing Cycle Use of Social Media Raise capital •  Identify value-added potential investors & find a path to them •  Solicit past investors in both your prior and comparable funds Originate •  Identify and reach out to relevant people & companies investments •  Become a magnet for investment opportunities Due diligence •  Review professional and personal lives of management •  Talk with firm’s network: customers, competitors, suppliers Negotiate Deal •  Gain insight into counterparty’s negotiating style, motivations Improve •  Recruit “A” performers operations •  Accelerate sales and marketing Exit investment •  Identify and more effectively negotiate with strategic acquirers© 2011 David Teten. More at teten.com.
  • Intro Org Chart Tradition Social Signals Network Next Steps Agenda •  Introduction •  Organizational Structure •  Traditional Deal Origination •  Social Media •  Signals of a Potential Investment •  Growing Your Corporate Network •  Next Steps© 2011 David Teten. More at teten.com.
  • Intro Org Chart Tradition Social Signals Network Next Steps Effective use of social media and other research tools allows you to filter for companies who are flashing signals that they are interested in your capital.© 2011 David Teten. More at teten.com. http://flickr.com/photos/krikit/2745563123/sizes/o/
  • Intro Org Chart Tradition Social Signals Network Next Steps Signals from the Status of Major Equity Owner •  Private equity firm in need of exit •  Corporation in distress / seeking to divest assets •  Short-term tax incentive •  Succession battle •  Death, Disease, Divorce (“the Three D’s”)© 2011 David Teten. More at teten.com.
  • Intro Org Chart Tradition Social Signals Network Next Steps Character – Competence – Relevance – Strength – Information – Number – Diversity Agenda •  Introduction •  Organizational Structure •  Traditional Deal Origination •  Social Media •  Signals of a Potential Investment •  Growing Your Corporate Network •  Next Steps© 2011 David Teten. More at teten.com.
  • Intro Org Chart Tradition Social Signals Network Next Steps Character – Competence – Relevance – Strength – Information – Number – Diversity Corporate Network Valuation Formula Ch = Character Co = Your Firm’s Competence R = Relevance of the contact S = Strength of your relationship I = Information N = Number of people D = Diversity N = D * ∑ (Chn*Con *Rn* Sn*In) n=1© 2011 David Teten. More at teten.com. David Teten and Scott Allen, The Virtual Handshake: Opening Doors and Closing Deals Online (www.TheVirtualHandshake.com)
  • Intro Org Chart Tradition Social Signals Network Next Steps Character – Competence – Relevance – Strength – Information – Number – Diversity Corporate Analysis Software provides an insider view of the org chart, compensation, and customer views of a company. Leading Providers of Corporate Analysis Data •  CogMap •  Glassdoor •  TheFunded •  TheOfficialBoard •  Tracked© 2011 David Teten. More at teten.com.
  • Intro Org Chart Tradition Social Signals Network Next Steps Character – Competence – Relevance – Strength – Information – Number – Diversity Case study: A set of angel investors sourced a transaction and invested $8m via an alumni email list. •  Daniel Zumino, founder of BCG Paris and angel investor, had made a small investment in a startup •  November 1999: He sent email to Stanford GSB alumni list seeking capital for the startup •  March 2000: Raised $8m through referral from alumni, via this listserv© 2011 David Teten. More at teten.com. David Teten and Scott Allen, The Virtual Handshake: Opening Doors and Closing Deals Online (www.TheVirtualHandshake.com)
  • Intro Org Chart Tradition Social Signals Network Next Steps Character – Competence – Relevance – Strength – Information – Number – Diversity Private equity funds are mostly unsophisticated in their use of the internet. Healthpoint Capital Blog, a Rare Private Equity Blog • $750m fund focused on the musculoskeletal sector — specifically orthopedics and dental • Send weekly email to 14,000 people • Publish a small percentage of content that their 5-person research team generates • Agenda: “make our website into the virtual Silicon Valley for our industry.”© 2011 David Teten. More at teten.com.
  • Intro Org Chart Tradition Social Signals Network Next Steps Character – Competence – Relevance – Strength – Information – Number – Diversity 36% of PE Funds are using Microsoft applications for CRM which are not designed for CRM (primarily Excel and Outlook). CRM Applications Used by Private Equity Funds© 2011 David Teten. More at teten.com. EquityTouch. ACG Events Survey Analysis, 2009. Available at www.touchahead.com/news.html
  • Intro Org Chart Tradition Social Signals Network Next Steps Character – Competence – Relevance – Strength – Information – Number – Diversity Well managed pipelines allow for use of a wide range of analytics to track dealflow. Selected Dealflow Analytics •  Activity Measures: # Phone calls made; # Phone connects with management/board members; # Meetings; # Deals brought to Monday morning meeting; # Memos with approved budget for due diligence; # Indications of Interest; # Letters of Intent sent; #Letters of Intent signed; # closed transactions •  Deal flow by source •  Pipeline analytics: Conversion ratios (from each stage of the pipeline to the next); Proprietary vs. non-proprietary deals; Response time •  Industry benchmarking measures: Percentage of deals seen completed by any firm; % of all deals consummated across the industry that fund would have considered which the fund saw© 2011 David Teten. More at teten.com.
  • Intro Org Chart Tradition Social Signals Network Next Steps Character – Competence – Relevance – Strength – Information – Number – Diversity Effective deal originators are data hounds. Tools for Assimilating Data into Your CRM System Data source Selected technology for inserting data into CRM system Business Cardscan, IRIScan, Neatco, Plustek Cards Emails Contact Capture, eGrabber, Gwabbit Cloud Plaxo© 2011 David Teten. More at teten.com.
  • Intro Org Chart Tradition Social Signals Network Next Steps Character – Competence – Relevance – Strength – Information – Number – Diversity Originators use blog and web readers to filter the data deluge. Leading Web Analysis and Filtering Tools •  RSS Readers (e.g., Google Reader) •  Alacra •  Connotate •  DigitalTrowel •  InfoNGEN •  FirstRain •  Skygrid© 2011 David Teten. More at teten.com.
  • Intro Org Chart Tradition Social Signals Network Next Steps Character – Competence – Relevance – Strength – Information – Number – Diversity PE funds should use creative ways to maintain ongoing visibility and relationships, e.g., fantasy football. •  Case study: Thompson Street Capital Partners uses an online football pool to keep in front of almost 1,000 deal sourcers at a cost of $2,000/year.© 2011 David Teten. More at teten.com.
  • Intro Org Chart Tradition Social Signals Network Next Steps Character – Competence – Relevance – Strength – Information – Number – Diversity Senior executives prefer to interact online behind barriers to lower-level personnel, just as they do within traditional networks. Sample Gated Communities for Executives •  IERGOnline.com •  Executive-Forum.org •  INMobile.org •  Some LinkedIn groups© 2011 David Teten. More at teten.com.
  • Intro Org Chart Tradition Social Signals Network Next Steps Character – Competence – Relevance – Strength – Information – Number – Diversity Investors can also connect with one another via online gated communities. Sample Gated Communities for Investors Private Capital Public Markets ACG.org FTAlphaville.FT.com/longroom Angelsoft.net SumZero.com Finemrespice.com/subrosa ValueInvestorsClub.com Village.Albourne.com Village.Albourne.com© 2011 David Teten. More at teten.com.
  • Intro Org Chart Tradition Social Signals Network Next Steps Agenda •  Introduction •  Organizational Structure •  Traditional Deal Origination •  Social Media •  Signals of a Potential Investment •  Growing Your Corporate Network •  Next Steps© 2011 David Teten. More at teten.com.
  • Intro Org Chart Tradition Social Signals Network Next Steps Any questions ? Download slides at navonpartners.com Free book download at TheVirtualHandshake.com© 2011 David Teten. More at teten.com.