Best Practices by Private Equity Funds in Deal Origination

117,734 views

Published on

Best Practices by Private Equity Funds in Deal Origination

by David Teten

How to Find Great Investments in Private Companies

Published in: Economy & Finance, Business
7 Comments
125 Likes
Statistics
Notes
  • Njce! Thanks for sharing.
       Reply 
    Are you sure you want to  Yes  No
    Your message goes here
  • Hello, If you have a business deals or Projects and you need an investor to finance your business and makes it grow, then contact us . We also have a business proposal on mutual funds benefit for a reliable partners. Any interested persons or organizations should contact us on below email address for further details. Email: longchi.bm@gmail.com Thanks, Long Chi
       Reply 
    Are you sure you want to  Yes  No
    Your message goes here
  • Details relating to SBLC, BG, MTN and other FINANCE related matters For Procedures and details contact us Daniel Aurel Anghel Email: daanghel.bgconsult@gmail.com Skype:daanghel.bgconsult
       Reply 
    Are you sure you want to  Yes  No
    Your message goes here
  • very good!
       Reply 
    Are you sure you want to  Yes  No
    Your message goes here
  • David, have you done any updates to this study / presentation since 2008? Would love to see if so.

    - Daniel Herr
       Reply 
    Are you sure you want to  Yes  No
    Your message goes here
No Downloads
Views
Total views
117,734
On SlideShare
0
From Embeds
0
Number of Embeds
40,328
Actions
Shares
0
Downloads
4,943
Comments
7
Likes
125
Embeds 0
No embeds

No notes for slide

Best Practices by Private Equity Funds in Deal Origination

  1. Best Practices of Private Equity Funds in Originating Investments Where Are the Deals?! Cold Calling is not the solution. from http://www.flickr.com/photos/23439761@N03/3258313816/sizes/l/ David Teten teten.com // @dteten
  2. Intro Social Media Signals Network Next Steps © 2016 David Teten. More at teten.com TraditionOrg Chart Don’t Take Notes! Download detailed slides and see the video at: teten.com/deals
  3. Intro Social Media Signals Network Next Steps © 2016 David Teten. More at teten.com TraditionOrg Chart Past audiences for this presentation include 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 • Harvard Business School Club of London • Harvard Business School Association of Southern California • Kauffman Fellows program participants • NYU Stern Private Equity and Venture Capital Conference • 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
  4. Intro Social Media Signals Network Next Steps © 2016 David Teten. More at teten.com TraditionOrg Chart Background David Teten and Chris Farmer published the first-ever research project on “Best Practices in Private Equity and Venture Capital Deal Origination” 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. Chris Farmer is CEO of Signalfire, a VC fund. 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 .
  5. Intro Social Media Signals Network Next Steps © 2016 David Teten. More at teten.com TraditionOrg Chart David Teten • Partner, ff Venture Capital, early-stage technology venture capital fund, one of the best performing seed- and early-stage venture capital firms in the U.S. • Previously serial entrepreneur and technology investment banker • Advised clients such as Goldman Sachs Special Situations Group, Icahn Enterprises, LLR Partners ($1.4b fund), Birch Hill Equity Partners (C$2B fund), and other institutional investors • Harvard MBA 1998, Yale BA, both with honors. • Teten.com / @dteten
  6. Intro Social Media Signals Network Next Steps © 2016 David Teten. More at teten.com TraditionOrg Chart • Introduction • Organizational Structure • Traditional Deal Origination • Social Media • Signals of a Potential Investment • Growing Your Corporate Network • Next Steps Agenda
  7. Intro Social Media Signals Network Next Steps © 2016 David Teten. More at teten.com TraditionOrg Chart We interviewed over 150 private equity and venture capital funds globally for this study. David Teten, Chris Farmer, Evalueserve, Yujin Chung, Neha Kumar Analysis of Private Equity and Venture Capital Funds in Study
  8. Intro Social Media Signals Network Next Steps © 2016 David Teten. More at teten.com TraditionOrg Chart Thompson Venture Economics, Franklin Park -10% -5% 0% 5% 10% 15% 20% 6% 3% 5% 9% Spread between 1st & 3rd Quartile return Median Return US Fixed Income US Public Equity US Private Equity US Venture Capital Asset Class Returns by Quartile (20 years ending Sep. 2005) The median PE/VC fund underperforms public markets, but the top quartile consistently outperforms.
  9. Intro Social Media Signals Network Next Steps © 2016 David Teten. More at teten.com TraditionOrg Chart Over $500M $25- $500M Public Private N. American Companies ($25MM+) Middle Market Sweet Spot ($25-$500MM) 75,853 69,838 #ofCompaniesbyAnnualRevenue 3% 7% 90% 3% 7% 89% 5% 9% 87% 6% 9% 85% 8% 11% 81% 10% 13% 78% 5% 9% 86% 2002 2003 2004 2005 2006 2007 2008 4,135 4,356 4,729 4,722 4,840 4,858 4,840 0 1,000 2,000 3,000 4,000 5,000 No.ofAnnouncedM&ADeals U.S. Private Company Universe Over $750M TEV $250- 750M Under $250M The vast majority of companies and total M&A transactions in the U.S. are in the middle market. Middle market M&A volume is stable, while the number of large M&A deals fluctuates from year to year. Audax Group, Capital IQ; William Blair & Company M&A market analysis M&A volume excludes deals with undisclosed transaction value. TEV=Total Enterprise Value N. American Companies >$25M Revenue U.S. M&A Volume by Transaction Size
  10. Intro Social Media Signals Network Next Steps © 2016 David Teten. More at teten.com TraditionOrg Chart 64% 69% 71% 78% 86% 93% 85% 2002 2003 2004 2005 2006 2007 2008 $36.9B $80.4B $110.6B $154.7B $286.2B $540.5B $181.9B 0 200 400 $600B ValueofAnnouncedDeals(Bars) DowJonesIndustrialAverage(Line) •10K •15K 97% 95% 92% 92% 91% 90% 93% 2002 2003 2004 2005 2006 2007 2008 1,066 1,340 1,440 1,798 2,238 2,627 1,670 0 500 1,000 1,500 2,000 2,500 3,000 #ofAnnouncedDeals U.S. Middle Market vs. Large Cap Deal Activity Over $250M TEV Under $250 TEV DJIA (right axis) Over $250M TEV Under $250 TEV Middle market deals (under $250m Total Enterprise Value (TEV)) account for over 90% of all U.S. private equity transactions, but only 20- 30% of total transaction value. Audax Group, Pitchbook.com Note: Deal value data excludes deals with undisclosed transaction sizes Number of U.S. Private Equity Deals by Transaction Size Value of U.S. Private Equity Deals by Transaction Size
  11. Intro Social Media Signals Network Next Steps © 2016 David Teten. More at teten.com TraditionOrg Chart 42 59 107 534 56 92 149 686 70 125 191 838 84 158 233 990 98 191 275 1,142 2004 2005 2006 2007 2008 742 983 1,224 1,465 1,706 0 500 1,000 1,500 2,000 #ofU.S.PrivateEquityFirms Under $500MM $500MM-1B $1-2B Over $2B CAGR: 23% U.S. private equity (especially middle market and small cap private equity) is fragmented and highly competitive Number of Active U.S. Private Equity Funds Audax Group, Pitchbook.com The number of private equity firms in the U.S. has more than doubled since 2004.
  12. Intro Social Media Signals Network Next Steps © 2016 David Teten. More at teten.com TraditionOrg Chart ThomsonReuters, AxialMarket estimates 2009 Deal Volume Under $200m The vast majority of transactions do not go through the best known intermediaries.
  13. Intro Social Media Signals Network Next Steps © 2016 David Teten. More at teten.com TraditionOrg Chart Proprietary deal origination is critical for PE funds. Increase in professionalization and number of sell-side advisors More sophisticated sellers (including many funds) Competition among private equity funds More Auctions à Winner’s Curse à Competing for the Lowest Return + + Opaque market +
  14. Intro Social Media Signals Network Next Steps © 2016 David Teten. More at teten.com TraditionOrg Chart Case study: Castle Harlan, $3b PE fund, studied correlation between different sourcing strategies and returns. Castle Harlan • 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.
  15. Intro Social Media Signals Network Next Steps © 2016 David Teten. More at teten.com TraditionOrg Chart Castle Harlan • 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. Castle Harlan origination study shows higher multiples for proprietary deals.
  16. Intro Social Media Signals Network Next Steps © 2016 David Teten. More at teten.com TraditionOrg Chart Info is private Few buyers based on Robert Bruner, Applied Mergers & Acquisitions, page 186 Ability of buyer to intervene to tailor pricing & terms Info is public Many buyers Sweet spot of highest returns Higher returns Lower returns Private information is more valuable than public information because of the leverage that discretion gives to the buyer. Buyer Power vs. Public Awareness of Transaction
  17. Intro Social Media Signals Network Next Steps © 2016 David Teten. More at teten.com TraditionOrg Chart You earn higher returns by investing in people you know well. Study of 2,501 portfolio managers of 1,648 actively managed equity funds that specialized in aggressive growth, growth, or growth and income stocks between January 1990 and December 2006 Source: The Small World of Investing: Board Connections and Mutual Fund Returns; Lauren Cohen, Andrea Frazzini, and Christopher Malloy, 2008 Connected Holdings=Stocks for which managers had the strongest connection to senior officials (same school at same time with same degree) Excess return=total gain minus the Treasury bill return Mutual Fund Managers’ Excess Returns in Companies Run by College/Graduate School Classmates vs. All Other Companies
  18. Intro Social Media Signals Network Next Steps © 2016 David Teten. More at teten.com TraditionOrg Chart Acquirer/ Investor Angel groups using Gust[i] Blackford Capital[ii] TA Associates[iii] Highland Capital[iv] AlliedSignal[v] Investing focus startups lower-middle- market growth companies growth companies synergistic businesses Profiled initially 20,850 1,394 NA NA 550 Target Selected 1,315 261 8,000 10,000 [vi] 190 Met 1,047 20 750 1,000 NA Negotiated with NA 14 NA NA 28 Detailed due diligence 577 20 NA NA 17 Acquired/ invested 541 3 10 to 12 10-20 10 Deals as % targeted companies 33.5% (2.1% of submissions) 1.1% 0.1%-0.2% 0.1%-0.2% 5.3% [i] Available at http://angelsoft.net/a/venture-valuation , as of twelve months ending March 17, 2010. [ii] 2009. [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, as of 1996-97. Closing one deal requires sourcing 80-100 deals. Investment Search Process (# Companies)
  19. Intro Social Media Signals Network Next Steps © 2016 David Teten. More at teten.com TraditionOrg Chart Blackford Capital (Fundless Sponsor) Investment Search Process (# Platform Companies) Most of the deals that didn’t close were due to substantial decline in financial performance between signing of LOI and closing of deal. 1 deal did not close due to inaccurate financials/ fraud. 2007 2008 2009 Notes Deals Reviewed 962 1,264 1,394 Blackford receives 2X as many deals – only tracks those that fit criteria NDAs 104 105 261 Blackford reviews these deals in detail Indications of Interest 20 18 14 Management Visit 16 11 20 Letter of Intent Submitted 12 11 10 Letter of Intent Signed 5 6 6 Deals Closed (incl. add-ons) 4 3 3 Reflects 4 platforms, 5 add-ons, 1 exit.
  20. Intro Social Media Signals Network Next Steps © 2016 David Teten. More at teten.com TraditionOrg Chart David Teten, Chris Farmer, Evalueserve, Yujin Chung, Neha Kumar VCs have to filter 9% more deals than PE funds to close one deal. Median Pipeline Size Necessary to Close One Deal
  21. Intro Social Media Signals Network Next Steps © 2016 David Teten. More at teten.com TraditionOrg Chart David Teten, Chris Farmer, Evalueserve, Yujin Chung, Neha Kumar Three investment professionals need 1 year to close 1 deal. Median Annual Pipeline Size per One Investment Professional
  22. Intro Social Media Signals Network Next StepsTraditionOrg Chart © 2016 David Teten. More at teten.com • Introduction • Organizational Structure • Traditional Deal Origination • Social Media • Signals of a Potential Investment • Growing Your Corporate Network • Next Steps Agenda
  23. Intro Social Media Signals Network Next StepsTraditionOrg Chart © 2016 David Teten. More at teten.com 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. 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. <10% 10%-19% 20%-29% 40%-49% 50%-59% 30%-39% * “Other” includes broken auctions, tangential relationships and well connected individuals. Parthenon Group In-House/Direct Less Same More 3 yrs from Now Currently <10% 10%-19% 30%-39% 40%-49% 50%-59% 60%-69% 70%-79% 80%-89% 90%-100% 20%-29% <10% 3 yrs ago 80%-89% 70%-79% 60%-69% 50%-59% 40%-49% 20%-29% 30%-39% 10%-19% 90%-100% Buy-side Intermediary Currently3 yrs ago <10% 10%-19% 20%-29% 30%-39% 40%-49% 50%-59% 3 yrs from Now Less Same More Sell-side Intermediary Currently 90%-100% 80%-89% 60%-69% 50%-59% 40%-49% 30%-39% 20%-29% 10%-19% <10% 3 yrs ago 80%-89% 70%-79% 20%-29% 10%-19% <10% 90%-100% 60%-69% 50%-59% 40%-49% 30%-39% 3 yrs from Now Less Same More 80% 60% 40% 20% 0% PercentofRespondents 100% Other 3 yrs ago <10% 3 yrs from Now Same More 20%-29% 30%-39% Currently <10% 10%-19% 20%-29% 30%-39% 10%-19%
  24. Intro Social Media Signals Network Next StepsTraditionOrg Chart © 2016 David Teten. More at teten.com Only 10% of deal origination is outsourced, on average. 80% 60% 40% 20% 0% AverageOutsourcing% 100% 95% 93% 88% 55% 52% 50% 38% 30% 24% 16% 15% 10% 5% 2% 2% Environmental DueDiligence Legal DueDiligence Accounting DueDiligence Tax Preparation Information Technology Market DueDiligence Legal/ Compliance Accounting Marketingand communications Human Resources Financing Funds Administration Reporting Deal Sourcing Investor Relations Office Management Portfolio Management 3 years from now Currently 10% Average Outsourcing Level by Function Parthenon Group
  25. Intro Social Media Signals Network Next StepsTraditionOrg Chart © 2016 David Teten. More at teten.com 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 37%Investment exit planning 40%Investment committee decisions 45% 52%Portfolio management 53%Fundraising 55%Sourcing Parthenon Group Increased competition makes firms focus on these processes now 80% believe these processes are important and already have them in place Only 25% believe this process is important Due diligence
  26. Intro Social Media Signals Network Next StepsTraditionOrg Chart © 2016 David Teten. More at teten.com David Teten, Chris Farmer, Evalueserve, Yujin Chung, Neha Kumar An increasing percentage of fund employees are specialist originators. Investment Team Distribution by Job Function
  27. Intro Social Media Signals Network Next StepsTraditionOrg Chart © 2016 David Teten. More at teten.com As funds grow larger the staffing leverage ratio increases, making a deliberate organizational structure more important. Private Equity Staffing Leverage Ratio (Professionals/Partner) 5x 4x 2x 3x 1x 0 <$500MM $500MM - $1B $1B - $2B $2B+ “This is a people business. Your annual Cap-Ex is people” Size of Most Recent Fund Parthenon Group Larger Funds Demand More Structure
  28. Intro Social Media Signals Network Next StepsTraditionOrg Chart © 2016 David Teten. More at teten.com David Teten, Chris Farmer, Evalueserve, Yujin Chung, Neha Kumar Responses for Don’t Know/Cant say is excluded from the analysis. Percentages may not add up to 100 due to rounding off. % of Funds With At Least One Person Tasked Specifically and Primarily with Deal Origination Specialist originators are more common in more developed markets.
  29. Intro Social Media Signals Network Next StepsTraditionOrg Chart © 2016 David Teten. More at teten.com • Persistence, or "hanging around the hoop" • Personality • Business judgment • Adequate financial sophistication • Seniority and appropriate title • Internal power • Creativity The best originators are aggressive, indefatigable, and personable. http://www.flickr.com/photos/randysonofrobert/2552298739/ Attributes of Top Originators (descending order of importance)
  30. Social Media Signals Network Next StepsIntro TraditionOrg Chart © 2016 David Teten. More at teten.com • Introduction • Organizational Structure • Traditional Deal Origination • Social Media • Signals of a Potential Investment • Growing Your Corporate Network • Next Steps Agenda
  31. Social Media Signals Network Next StepsIntro TraditionOrg Chart © 2016 David Teten. More at teten.com Sourcing the Deal, Merrill Corp./The Deal, May 2010 Professional relationships drive the great majority of deal flow. What is the most important process your company's internal group uses to locate possible deals?
  32. Social Media Signals Network Next StepsIntro TraditionOrg Chart © 2016 David Teten. More at teten.com Intermediaries refer deals to funds primarily in the hopes of future revenues. • Possibility of future revenue • Integrity • High certainty to close • Responsiveness • “Fair” treatment of sellers • Experience with the industry or owner type • Friendship • Candid feedback • Maintaining a single point of contact http://www.flickr.com/photos/extranoise/3382930813/ Top Reasons Intermediaries Refer Deals to Funds (descending order of importance)
  33. Social Media Signals Network Next StepsIntro TraditionOrg Chart © 2016 David Teten. More at teten.com Companies favor a particular investor for the same reasons as an intermediary (see prior page), plus a range of other factors. • Economics • Added Value • “Two bites of the apple” • 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, http://www.growthbusiness.co.uk/news/fundraising-deals/27442/part_2/private-equity-finding-a-match.thtml , http://www.flickr.com/photos/billselak/461062697/ Top Reasons Companies Select a Given Investor (in descending order of importance)
  34. Signals Network Next Steps Warm – Lukewarm – Ice Intro TraditionOrg Chart Social Media © 2016 David Teten. More at teten.com The right type of specialization boosts returns. 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. 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. • 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.
  35. Signals Network Next Steps Warm – Lukewarm – Ice Intro TraditionOrg Chart Social Media © 2016 David Teten. More at teten.com Differentiation makes origination more efficient. Selected Highly Differentiated Investing Strategies Strategy Example 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 them up as independent ventures Exigen Capital 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
  36. Signals Network Next Steps Warm – Lukewarm – Ice Intro TraditionOrg Chart Social Media © 2016 David Teten. More at teten.com • 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 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. Haynes, Bill. “Making Media Count”. PrivateEquityOnline, April 7, 2009. Recommendations: Journalists’ Evaluation of PE Funds’ Communication Skills
  37. Signals Network Next Steps Warm – Lukewarm – Ice Intro TraditionOrg Chart Social Media © 2016 David Teten. More at teten.com Almost no one sources deals from limited partners, except: • Funds who received most or all of their funding from one entity • VCs with universities as LPs • Executive funds (with preferential economics for executives who are friends of the firm) http://www.flickr.com/photos/somegeekintn/3709203268/
  38. Signals Network Next Steps Warm – Lukewarm – Ice Intro TraditionOrg Chart Social Media © 2016 David Teten. More at teten.com 30-50% of mid-market deals are typically club deals. Private Equity Club Deals as % of Total Number of Deals, by Deal Size (US) Pitchbook.com data through May 2010
  39. Signals Network Next Steps Warm – Lukewarm – Ice Intro TraditionOrg Chart Social Media © 2016 David Teten. More at teten.com Selected Searchable Databases of PE/VC Funds You can identify potential co-investors through any of multiple online databases. All Investors Private Equity Venture Capital • Galantes • Grey House • LP Source • Pratt’s Guide • VentureXpert • Asia PE Research • Eurekahedge • Pitchbook • PrivateEquityFirms.com • ThompsonOne PE Module • Venture Capital • CB Insights • CrunchBase • PWC MoneyTree • TheFunded • VentureDeal • Asian VC Journal • Venture Source
  40. Signals Network Next Steps Warm – Lukewarm – Ice Intro TraditionOrg Chart Social Media © 2016 David Teten. More at teten.com Although we recommend PEs partner with corporates, we identified very few investors who systematically worked with corporations as sourcing partners. Case Study: Castle Harlan, $3b PE Fund • Howard Morgan, Co-President, reports they have executed four transactions in which a corporation was key to sourcing the deal. • "Typically the corporate is a co-investor, and Castle Harlan leads the transaction. Partnering with corporations is a pathway to them owning the asset outright. Usually that is not contractually guaranteed, but happens organically. From the point of view of the corporation, we’re a risk-mitigated way to get the asset. Hopefully when we sell the business it’s at a very different stage than when we got it. In particular, strategics don’t have resources or interest to deal with stressed entities. We do. "
  41. Signals Network Next Steps Warm – Lukewarm – Ice Intro TraditionOrg Chart Social Media © 2016 David Teten. More at teten.com FundCommitment Free Agent expenses+upside Rejected Executives Senior Advisor / Deal Executive expenses+upside Executive/Entrepreneur in Residence retainer+upside Portfolio Company / NewCo Management salary+upside Executive’s Income Expert Network / Interim Executive hourly comp Operating Partner salary+carry PE Fund Structural Options in Working with Operating Executives Private equity funds have a wide range of options in working with executives, many of which have no fixed cost.
  42. Signals Network Next Steps Warm – Lukewarm – Ice Intro TraditionOrg Chart Social Media © 2016 David Teten. More at teten.com based on table from Jon Weber, Anchorage Advisors LLC Senior Advisor Network vs. Traditional Talent Sources Senior advisor networks offer a low-fixed-cost, high-return talent pool option. Experts and Consultants Senior Advisor Network Executive Recruitment Relationship Owner Expert network / consultancy Fund Recruiting firm, then handed over to fund Duration 1–2 hours to 3 months 6 months–2 years+ Permanent job and board positions Sample Service Providers Gerson Lehrman, McKinsey, Evalueserve Notch Partners Heidrick & Struggles, Russell Reynolds, Ignition Search Partners Illustrative Cost $1,000/hr for expert networks $300–700/hr for consultants Sometimes retainer, sometimes paid like investment banker 1/3 compensation Driver of Exec Compensation Length of consultation Value creation and continued involvement with client companies Winning full-time employment Confidentiality NDA possibly. Consultant may “shop” ideas. Signed, enforceable NDA NDA unusual
  43. Signals Network Next Steps Warm – Lukewarm – Ice Intro TraditionOrg Chart Social Media © 2016 David Teten. More at teten.com U.S. Funds That Typically Partner with Executives to Execute a Transaction and Bring in New Management Upon Investing Data based on firm websites. Frontenac AUM based on last two funds. # Investments/Year based on mean activity level over firm’s existence, with some adjustment for growth of fund over time. Partnering with operating executives is a successful strategy which is a focus for only a small number of funds. Private Equity Fund Founded AUM ($m) Cum. # Investments # Deals/ 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
  44. Signals Network Next Steps Warm – Lukewarm – Ice Intro TraditionOrg Chart Social Media © 2016 David Teten. More at teten.com We expect an increase in executive-led transactions. 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 ** “Decision May Help Revive Management Buyouts”, Steven Davidoff, NY Times, http://dealbook.blogs.nytimes.com/2009/10/19/decision-may-help-revive-management-buyouts/
  45. Signals Network Next Steps Warm – Lukewarm – Ice Intro TraditionOrg Chart Social Media © 2016 David Teten. More at teten.com Entrepreneurs-in-Residence are a powerful,underused model. • An EIR is typically a serial entrepreneur or top-flight executive that a venture capital firm would like to fund in his or her next venture. • According to many industry insiders, venture firms often get better returns from companies created by EIRs than they get by buying equity in existing startups. In the early years after Benchmark’s founding in the mid-1990s, approximately half the companies the firm funded were led by EIRs. Even without the firm’s breakout investment in eBay, its early funds would rank among the all-time best in the venture industry. Other firms with active EIR programs: Benchmark Capital, General Catalyst, Accel Partners, Bessemer Venture Partners, etc. • The EIR typically joins the fund for 6-18 months and reviews business plans alongside the venture capitalists at the fund. • The benefit of the program is that the entrepreneur gets an excellent window into the marketplace, access to the firm’s resources and network, and realtime feedback from the investment partners. • The venture capital fund gains the sector expertise of the EIR and has a front row seat to invest in the entrepreneur’s next venture.
  46. Signals Network Next Steps Warm – Lukewarm – Ice Intro TraditionOrg Chart Social Media © 2016 David Teten. More at teten.comDavid 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 & Western Europe“ 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."
  47. Signals Network Next Steps Warm – Lukewarm – Ice Intro TraditionOrg Chart Social Media © 2016 David Teten. More at teten.com A core group of intermediaries are typically highly influential in their focus sector; these are the people to know. • Lawyers • Private Bankers • Accountants • Recruiters • Insurance brokers • University Technology Transfer Offices 1999 IPO Deals from IPOData.com, cited in “Social Networks in Silicon Valley”, Castilla, Hwang, Granovetter, and Granovetter, http://web.mit.edu/ecastill/www/publications/CastillaExtract.pdf IPO Deals in California Information Retrieval Services Industry Each tie=firms worked together on at least one IPO Length of tie line inversely proportional to # IPOs worked on Wilson Sonsini; Brobeck; Cooley Godward; Goldman Sachs; Morgan Stanley; CS First Boston; Pricewaterhouse- Coopers; Ernst & Young
  48. Signals Network Next Steps Warm – Lukewarm – Ice Intro TraditionOrg Chart Social Media © 2016 David Teten. More at teten.com 75% of attendees at the biggest mid-market private equity conference, ACG Intergrowth, directly attribute new deals to their participation. http://www.flickr.com/photos/programmerman/2315566040/sizes/l/ $3b PE fund Castle Harlan requires each partner to speak to at least two major conferences per year.
  49. Signals Network Next Steps Warm – Lukewarm – Ice Intro TraditionOrg Chart Social Media © 2016 David Teten. More at teten.com Private equity funds use expert networks to originate deals in three main ways: Based on interview with Michael Duran, Gerson Lehrman Group, and other sources • 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.
  50. Signals Network Next Steps Warm – Lukewarm – Ice Intro TraditionOrg Chart Social Media © 2016 David Teten. More at teten.com Generalists • Gerson Lehrman Group • Coleman Research Group • Guidepoint Specialty/Other Players • Advantus Global (Circle of Experts) • Intota • Kingfish Group • Primary Global Research • Primary Insight • Round Table Group Medical • MEDACorp (Leerink Swaan) • Sermo Selected Leading Expert Networks The expert network industry is the fastest-growing sector of the investment research sector, with aggregate revenues over $300m.
  51. Signals Network Next Steps Warm – Lukewarm – Ice Intro TraditionOrg Chart Social Media © 2016 David Teten. More at teten.com Transaction count includes transactions which are not Executive-Led Transactions * Harvey has participated in 110 transactions, of which 35 were platform companies. ** The equity figure shown is only for platforms, not add-ons. *** Cook’s transaction sizes have ranged from $5m to $800m. The data above implies average platform deal size of $31m for Harvey. This in turn implies average transaction fee revenues of $740K, assuming double Lehman and ignoring carry. Some acquisition search firms also help source operating executives. Selected Acquisition Search Firms Firm Founded # of Transactions # Transactions/ Year Cumulative Equity Invested ($m) Harvey & Company 1998 110* 9.2 >$1,100** Dinan & Company 1988 95 4.3 NA Cook Associates, Inc.*** 1996 65 4.6 $1,000 ValuFinder Group 1979 47 1.5 NA Richard Vander Kaay & Associates 1982 33 1.2 NA Notch Partners 2002 NA NA NA
  52. Signals Network Next Steps Warm – Lukewarm – Ice Intro TraditionOrg Chart Social Media © 2016 David Teten. More at teten.com 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 and investment opportunities Typically do not provide advice on valuation/structuring/negotiation, unlike a traditional investment banker Costs No fixed cost, other than (sometimes) retainer Additional layer of costs (typically 1% to 2% of the 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 to fish Accused by some funds of exploiting the buyer’s name to grow their own database Motivation Highly motivated Typically motivated only to close a deal, not by the quality of the deal
  53. Signals Network Next Steps Warm – Lukewarm – Ice Intro TraditionOrg Chart Social Media © 2016 David Teten. More at teten.com Almost no PE funds reported using business brokers. Advantages vs. Disadvantages of Business Brokers Advantages Disadvantages Value-Add Introductions "They can't provide financing." Costs Lower fees, typically in the range of 1% of enterprise value "They can create situations where there is an auction, which is not our preferred way of buying." Focus Helpful for sourcing small targets (typical value <$10m) "The businesses (and the brokers themselves) are usually not very sophisticated." Database Price of the selling company is typically lower "The transaction can be quite unstructured and unsafe, and documentation is poor." Motivation Get the deal done "They can get in the way and muddy the waters. They can delay negotiations and make communications more difficult.“ "They can play games: the broker will say they represent a $20m Chicago company. Then we buy a $30m Chicago company, and they say it's the same firm because it grew a bit. We've had problems like that."
  54. Signals Network Next Steps Warm – Lukewarm – Ice Intro TraditionOrg Chart Social Media © 2016 David Teten. More at teten.com 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. • 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. Where to Buy Secondaries NYPPEX Private Markets, "2009 Secondary Private Market Review and 2010 Outlook". New York, NY, January 8, 2010.
  55. Signals Network Next Steps Warm – Lukewarm – Ice Intro TraditionOrg Chart Social Media © 2016 David Teten. More at teten.com We recommend also using traditional marketing techniques. Westshore Capital Partners; Weinbach Group • 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).
  56. Signals Network Next Steps Warm – Lukewarm – Ice Intro TraditionOrg Chart Social Media © 2016 David Teten. More at teten.com We identified almost no instances of a successful company that started as a business plan contest winner. http://flickr.com/photos/crincon/1143195754/sizes/l/
  57. Signals Network Next Steps Warm – Lukewarm – Ice Intro TraditionOrg Chart Social Media © 2016 David Teten. More at teten.com Funds with cold-calling programs are consistently top-quartile performers. http://www.flickr.com/photos/23439761@N03/3258313816/sizes/l/ • 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. Key Steps for a Successful Cold Calling Program
  58. Signals Network Next Steps Warm – Lukewarm – Ice Intro TraditionOrg Chart Social Media © 2016 David Teten. More at teten.com Based on Bruner, Robert F., Applied Mergers and Acquisitions. New York: John Wiley & Sons, 2004. Page 90. You can identify target companies with four major techniques: Listen to markets (“top down”) Listen to firms (“bottom up”) Start with Data (“inside out”) Observe a pattern of attractive performance in a certain sector, e.g., past successful investments by your competitors. Analyze performance results for sectors of the market, then drill down to the most attractive companies. Analyze performance of individual companies, and seek to identify common causal patterns Start with ideas (“outside in”) Start with a theme you believe in, e.g., the aging of Western populations. Investigate the implications of your theme on your industries of interest. Investigate the implications of your theme on your companies of interest.
  59. Signals Network Next Steps Warm – Lukewarm – Ice Intro TraditionOrg Chart Social Media © 2016 David Teten. More at teten.com Sample Market Mapping Approach Market mapping is a powerful way to identify white space. # 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 and/or geographies of interest. We expect growth of financial services providers with low-risk investing products. 4 List major players in target industries/geographies, and how each will be impacted by investment themes. Asset managers with expertise in annuities and fixed income products will likely benefit. 5 Iteratively improve market map based on feedback from industry Publish elements of the market map to key sector players through industry forums and mass media. 6 Determine which activities along the value chain offer the highest return (typically the proprietary ones). Develop deep ties in the brokerage community that distribute 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 feedback and lessons from investment prospects. Maintain internal wiki or database regularly updated with key market data and insights.
  60. Signals Network Next Steps Warm – Lukewarm – Ice Intro TraditionOrg Chart Social Media © 2016 David Teten. More at teten.com Quality Products Customer Segment Distribution Channel Contextual information about each company to include: • Management strength • Product strength • Client desirability • Financial returns Market maps should be built along the most pertinent axes of differentiation within an industry.
  61. Signals Network Next Steps Warm – Lukewarm – Ice Intro TraditionOrg Chart Social Media © 2016 David Teten. More at teten.com Carl Icahn, #2 richest man in New York icahnreport.com The last option for buying a company is: make an offer to take private a public company.
  62. Social Media Signals Network Next StepsIntro TraditionOrg Chart © 2016 David Teten. More at teten.com • Introduction • Organizational Structure • Traditional Deal Origination • Social Media • Signals of a Potential Investment • Growing Your Corporate Network • Next Steps Agenda
  63. Social Media Signals Network Next StepsIntro TraditionOrg Chart © 2016 David Teten. More at teten.com Traditional outbound marketing still works, but less effectively. • Spam filters, email filters, and Gmail Smart Inbox make it less likely executives see unsolicited emails. • Caller ID and Google Voice make it easier to filter calls. • As networks become more visible and searchable, it becomes less likely that someone who contacts you without an introduction is a worthwhile person with whom you should talk. http://www.slideshare.net/mzkagan/what-is-social-media-2005829 . http://www.flickr.com/photos/sreejithk2000/2385193167/sizes/l/
  64. Social Media Signals Network Next StepsIntro TraditionOrg Chart © 2016 David Teten. More at teten.com Social media technologies are pertinent throughout the investing cycle. 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 investments • Identify and reach out to relevant people & companies • 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 operations • Recruit “A” performers • Accelerate sales and marketing Exit investment • Identify and more effectively negotiate with strategic acquirers How Investors Are Using Social Media
  65. Social Media Signals Network Next StepsIntro TraditionOrg Chart © 2016 David Teten. More at teten.com Across buyers of all services, online tools are increasingly important. Methods Buyers Are Very/Somewhat Likely to Use to Initially Identify and Learn More about Professional Services Providers Mike Schultz and John Doerr, How Clients Buy: 2009 Benchmark Report on Professional Services Marketing & Selling from the Client Perspective, Fig 3.1, 22, http://www.raintoday.com/howclientsbuy.htm
  66. Signals Network Next StepsIntro TraditionOrg Chart Social Media © 2016 David Teten. More at teten.com • Introduction • Organizational Structure • Traditional Deal Origination • Social Media • Signals of a Potential Investment • Growing Your Corporate Network • Next Steps Agenda
  67. Signals Network Next StepsIntro TraditionOrg Chart Social Media © 2016 David Teten. More at teten.com Attractive investments typically demonstrate some of the attributes below, which are visible or scrapeable online. Industry Rapid growth in industry revenues Fragmented market suitable for acquisition Performance Rapid growth in revenues and/or profits Geographically concentrated Management Experienced, proven management team Business Model #1 or #2 market share in industry, or at least potential to reach that status Sample Growth Signals Sample Liquidity Signals Status of major equity owner Large corporation shedding subsidiaries Death, disease and divorce (“the Three Ds”) Status of CEO Older CEO seeking retirement Industry/economic trends Consolidation in industry
  68. Signals Network Next StepsIntro TraditionOrg Chart Social Media © 2016 David Teten. More at teten.com 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. http://flickr.com/photos/krikit/2745563123/sizes/o/
  69. Signals Network Next StepsIntro TraditionOrg Chart Social Media © 2016 David Teten. More at teten.com 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”)
  70. Signals Network Next StepsIntro TraditionOrg Chart Social Media © 2016 David Teten. More at teten.com • Serial entrepreneur seeking new challenge • CEO becoming tired, aged, and/or acknowledging limits of his or her competence • Death, Disease, Divorce Signals from the CEO
  71. Signals Network Next StepsIntro TraditionOrg Chart Social Media © 2016 David Teten. More at teten.com Signals from Corporate Performance: Rapid growth http://flickr.com/photos/laserstars/908946494/sizes/o/
  72. Signals Network Next StepsIntro TraditionOrg Chart Social Media © 2016 David Teten. More at teten.com Signals from Corporate Performance: Underperformance http://flickr.com/photos/carve/2856365431/sizes/l/
  73. Signals Network Next StepsIntro TraditionOrg Chart Social Media © 2016 David Teten. More at teten.com Signals from Industry/Economic Trends • Consolidation • Competitors raising capital/exiting • Company has large short-term growth opportunities which it cannot readily exploit with existing capital resources • Growth Sector (e.g., alternative energy) • Inadequate access to credit is impeding ability to finance normal operations
  74. Social Media Signals Network Next Steps Character – Competence – Relevance – Strength – Information – Number – Diversity Intro TraditionOrg Chart © 2016 David Teten. More at teten.com • Introduction • Organizational Structure • Traditional Deal Origination • Social Media • Signals of a Potential Investment • Growing Your Corporate Network • Next Steps Agenda
  75. Social Media Signals Network Next Steps Character – Competence – Relevance – Strength – Information – Number – Diversity Intro TraditionOrg Chart © 2016 David Teten. More at teten.com Firms typically fail to capitalize on their internal and external networks. Forrester Research/David Teten and Scott Allen, The Virtual Handshake: Opening Doors and Closing Deals Online (www.TheVirtualHandshake.com) • Knowledge not readily searchable • Knowledge not retained when employees leave • Relationships not visible • Relationships primarily tied to colocated people; people in other offices can’t leverage that knowledge and the relationships that underly them • Millennials expect and embrace social technologies, and are disappointed and less productive when they are missing Failures of Existing Corporate Networks
  76. Social Media Signals Network Next Steps Character – Competence – Relevance – Strength – Information – Number – Diversity Intro TraditionOrg Chart © 2016 David Teten. More at teten.com David Teten and Scott Allen, The Virtual Handshake: Opening Doors and Closing Deals Online (www.TheVirtualHandshake.com) 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 = D * ∑ (Chn*Con *Rn* Sn*In) N n=1 Corporate Network Valuation Formula
  77. Social Media Signals Network Next Steps Character – Competence – Relevance – Strength – Information – Number – Diversity Intro TraditionOrg Chart © 2016 David Teten. More at teten.com Average Strength = Minutes Available / Person therefore… Total Minutes Available = Average Strength * Number of People You need to balance Strength and Numbers. vs.
  78. Signals Network Next Steps Character – Competence – Relevance – Strength – Information – Number – Diversity Social MediaIntro TraditionOrg Chart © 2016 David Teten. More at teten.com Biography analysis software allows you to search by common affinity and more effective subsequent outreach. • Boardex • Klout* • LinkedIn • Saleforce Data.com • Pipl • Relationship Science • ZoomInfo Leading Providers of Biography Analysis Data * ffVC portfolio company
  79. Signals Network Next Steps Character – Competence – Relevance – Strength – Information – Number – Diversity Social MediaIntro TraditionOrg Chart © 2016 David Teten. More at teten.com • CogMap • Glassdoor • TheFunded • TheOfficialBoard Corporate analysis software provides an insider view of the org chart, compensation, and customer views of a company. Leading Providers of Corporate Analysis Data
  80. Signals Network Next Steps Character – Competence – Relevance – Strength – Information – Number – Diversity Social MediaIntro TraditionOrg Chart © 2016 David Teten. More at teten.com David Teten and Scott Allen, The Virtual Handshake: Opening Doors and Closing Deals Online (www.TheVirtualHandshake.com) • 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 list service Case study: A set of angel investors sourced a transaction and invested $8m via an alumni email list.
  81. Signals Network Next Steps Character – Competence – Relevance – Strength – Information – Number – Diversity Social MediaIntro TraditionOrg Chart © 2016 David Teten. More at teten.com 10-15% of the active VC population of 1,000 blog and tweet. Jeff Bussgang, Flybridge Capital Partners . http://www.pehub.com/59953/why-do-vcs-blog-and-tweet/ . http://techcrunch.com/2010/01/14/top-ten-vc-blogs-q409/ Top VC Blogs, Average Monthly Unique Views (4Q09)
  82. Signals Network Next Steps Character – Competence – Relevance – Strength – Information – Number – Diversity Social MediaIntro TraditionOrg Chart © 2016 David Teten. More at teten.com Private equity funds are mostly unsophisticated in their use of the internet; MCM Capital is an exception. • Tools • Tools: website, Facebook, LinkedIn, weekly blog, RSS feed, email newsletter, email archive page, email signature • CRM system (Goldmine), which automatically pulls in contact inquiries from site • Target terms for search engine optimization: micro-cap private equity fund, leverage buyout, Cleveland based private equity, lower middle market, leverage buyout firm, management buyout • Cost: • New website • Four professionals collectively spend 15-20 hours / week on social media outreach MCM Capital, a MicroCap PE Fund in Cleveland, OH http://www.teten.com/blog/2010/12/05/how-a-small-private-equity-fund-uses-social-media-for-building-its-investment-pipeline-and-raising-capital/
  83. Signals Network Next Steps Character – Competence – Relevance – Strength – Information – Number – Diversity Social MediaIntro TraditionOrg Chart © 2016 David Teten. More at teten.com MCM Capital has significantly increased sourcing via their social media presence. • Traffic • Overall traffic increased 14% on average each month • Referral traffic (traffic coming from other websites including blog, LinkedIn, Facebook, and email newsletter) increased 119% over the quarter • Visitor's average time on site has doubled from 1:32 minutes to 3:05 minutes • Deals • Deal flow increased by 150% in total over the quarter, although this cannot be solely attributed to social media. • Investors • Two inquires from LP's, vs. a base of zero MCM Capital Social Media Results (July - October 2010) http://www.teten.com/blog/2010/12/05/how-a-small-private-equity-fund-uses-social-media-for-building-its-investment-pipeline-and-raising-capital/
  84. Signals Network Next Steps Character – Competence – Relevance – Strength – Information – Number – Diversity Social MediaIntro TraditionOrg Chart © 2016 David Teten. More at teten.com Healthpoint Capital is a much larger fund investing significant resources into their social media presence. • $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. Healthpoint Capital Blog, a Rare Private Equity Blog
  85. Signals Network Next Steps Character – Competence – Relevance – Strength – Information – Number – Diversity Social MediaIntro TraditionOrg Chart © 2016 David Teten. More at teten.com Best Practices in VC Blogging (written humorously, but still good advice) Hi, I’m a tech VC on Twitter. I’m @xyzvc My icon is cool. It’s a painting/cartoon/wacky photo. Shows that I’m hip and approachable. But when I meet with you, I’ll still crush your dreams. I tweet about technology, but occasionally post personal stuff. Important to show I have a sensitive side and care about more than just making tons of dough. I use # tags, sometimes as a funny form of emphasis. Kind of like a wink and a smile ;) #donttakethisposttooseriously I love Twitter because I can broadcast my blog posts. Otherwise, no one would read them! I blog at xyzvc.com! I tweet blog posts with advice on fundraising, customer acquisition, and company building. Usually, someone really smart has said it before and said it better. But I haven’t been in Hacker News for a while, so I figured there is no harm reinventing the wheel. Retweeting is fun. It’s like a virtual high-five. I retweet the posts of my partners, coinvestors, and entrepreneurs I’ve backed. Oh, I also retweet posts from guys whose butts I’m currently kissing so that they will like me. I really hope @fredwilson retweets this… I’d get so many new followers! My portfolio companies are the best. I will share so much of their good news with you it will make you want to unfollow me (unless you are a co-investor, in which case you will probably RT and add a #) If a portfolio company is doing bad, no Twitter love. It’s like going to Disneyworld and trying to find Hercules or Mulan. It’s like they never existed. I also tweet about the cool places I’ve been (via Foursquare and Gowalla), things I buy (via Swipely and Blippy), and the cool places I’m going to go (via Plancast). Wow, that’s a lot of tweeting! That’s why I also tweet about how busy I’ve been and how little I’ve slept. It’s a tough life. Full disclosure, I’ve been a tech VC and I’ve done most of these things. Hi, I’m a tech VC on Twitter (by Rob Go, NextView Ventures) http://www.robgo.org/post/890368565/hi-im-a-tech-vc-on-twitter
  86. Signals Network Next Steps Character – Competence – Relevance – Strength – Information – Number – Diversity Social MediaIntro TraditionOrg Chart © 2016 David Teten. More at teten.com We recommend search engine optimizing both your firm site and the internet presence of the individuals who work there. • Scan targets’ sites to understand the language that they use when searching. • Use keywords Inconsistently. • Name what you’re selling. • Optimize top of the page. • Accuracy matters. • https://adwords.google.com/select/KeywordToolExternal http://flickr.com/photos/neilt/2517652/sizes/o/ Search Engine Optimization 101
  87. Signals Network Next Steps Character – Competence – Relevance – Strength – Information – Number – Diversity Social MediaIntro TraditionOrg Chart © 2016 David Teten. More at teten.com Relationship capital management software helps lever corporate networks. Relationships ranked by Strength Automatically discovered from passive sources See which colleagues have best relationships to target Privacy Access Layer configured for firm’s culture Search for people, companies, industries Email traffic patterns, address books, billing systems, employment history, etc. Contact Networks (Thomson Reuters) Examples: Hubbard One ContactNet, Leverage Software Hubbard One ContactNet Screenshot
  88. Signals Network Next Steps Character – Competence – Relevance – Strength – Information – Number – Diversity Social MediaIntro TraditionOrg Chart © 2016 David Teten. More at teten.com David Teten and Scott Allen, The Virtual Handshake: Opening Doors and Closing Deals Online (www.TheVirtualHandshake.com) Case Study: Lower mid-market PE fund sourced an industrial deal via an online job board. • Hamilton Robinson LLC, PE fund; invested in 40 companies worth over $1b cumulatively • July: Mark Riser (Darden 1994) placed request in Darden Alumni website noting Hamilton Robinson’s desire to find C-level managers to back in management buyouts • Riser’s classmate forwarded ad to Mark Ponozzo, President, Black Clawson Converting Machinery, $35m firm • May of next year: closed mgmt. buyout of Black Clawson
  89. Signals Network Next Steps Character – Competence – Relevance – Strength – Information – Number – Diversity Social MediaIntro TraditionOrg Chart © 2016 David Teten. More at teten.com • Phone • Email • Web conferencing • Instant messaging • Internet telephony (e.g., Skype) • SMS • Twitter Using multiple media channels promotes stronger trust- building. Caroline Haythornthwaite, “Strong, Weak, and Latent Ties and the Impact of New Media,” The Information Society, 18 ( 2002) 385–401. http://flickr.com/photos/re-ality/41676755 Major Media Channels for Origination (descending order of importance)
  90. Signals Network Next Steps Character – Competence – Relevance – Strength – Information – Number – Diversity Social MediaIntro TraditionOrg Chart © 2016 David Teten. More at teten.com CRM Applications Used by Private Equity Funds EquityTouch. ACG Events Survey Analysis, 2009. Available at www.touchahead.com/news.html 36% of PE Funds are using Microsoft applications for CRM which are not designed for CRM (primarily Excel and Outlook).
  91. Signals Network Next Steps Character – Competence – Relevance – Strength – Information – Number – Diversity Social MediaIntro TraditionOrg Chart © 2016 David Teten. More at teten.com A CRM system is useless without compliance. • Senior management role modeling. • Ensure CRM generates direct value to users, e.g., by providing annual updating of information by admin staff. • Base part of compensation on compliance. • Tie compensation to firm performance, not individual performance. • Make data entry easy, e.g., by enabling sync to mobile devices. • Allow easy data export (controversial but not unheard of.) How to Ensure Use of CRM
  92. Signals Network Next Steps Character – Competence – Relevance – Strength – Information – Number – Diversity Social MediaIntro TraditionOrg Chart © 2016 David Teten. More at teten.com Well managed pipelines allow for use of a wide range of analytics to track dealflow. • 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 Selected Dealflow Analytics
  93. Signals Network Next Steps Character – Competence – Relevance – Strength – Information – Number – Diversity Social MediaIntro TraditionOrg Chart © 2016 David Teten. More at teten.com Effective originators are data hounds Tools for Assimilating Data into Your Contact Relationship Management (CRM) System Data source Selected technology for inserting data into CRM Cards FullContact Data Enrichment Avention, ClearBit, Cloze, Data.com, Discover.ly, Evercontact, Introhive, LeadIQ, Plaxo, Ringlead, Salestools.io, SalesOps, VibeApp, DiscoverOrg Other LinkedIn Full CRM Microsoft Dynamics, Salesforce, SalesforceIQ, Act, Base, many others
  94. Signals Network Next Steps Character – Competence – Relevance – Strength – Information – Number – Diversity Social MediaIntro TraditionOrg Chart © 2016 David Teten. More at teten.com 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.
  95. Signals Network Next Steps Character – Competence – Relevance – Strength – Information – Number – Diversity Social MediaIntro TraditionOrg Chart © 2016 David Teten. More at teten.com Senior executives prefer to interact online behind barriers to lower-level personnel, just as they do within traditional networks. Sample Gated Communities for Executives • IERG Online • Executive Forum • Sermo • Some LinkedIn groups
  96. Signals Network Next Steps Character – Competence – Relevance – Strength – Information – Number – Diversity Social MediaIntro TraditionOrg Chart © 2016 David Teten. More at teten.com Investors can also connect with one another via online gated communities. Sample Gated Communities for Investors Angel Group Platforms Angel Communities Consumer Loans Private Equity Public Gust AngelList LendingClub Association for Corporate Growth Albourne Village Proseeder CircleUp Prosper Axial FT Alphaville Long Room FundersClub Intralinks Deal Nexus Sum Zero OurCrowd MergerMarket Value Investors Club SeedInvest
  97. Signals Network Next StepsSocial MediaIntro TraditionOrg Chart © 2016 David Teten. More at teten.com • Introduction • Organizational Structure • Traditional Deal Origination • Social Media • Signals of a Potential Investment • Growing Your Corporate Network • Next Steps Agenda
  98. Signals Network Next StepsSocial MediaIntro TraditionOrg Chart © 2016 David Teten. More at teten.com Social media is a better platform for starting and researching transactions. Parameters Face-to-Face Social Media Character Judge by a handshake SEC filings Competence Personal resources Enterprise resources Relevance Semi-random Focused, searchable Strength Limited channels Multi-media Information Poor visibility Detailed, current data Number Small Large Diversity Restricted by time, space Crosses time & space Moving Deals Forward Face-to-Face vs. Online
  99. Signals Network Next StepsSocial MediaIntro TraditionOrg Chart © 2016 David Teten. More at teten.com 1. Analyze your network using the Seven Keys. 2. Use Market Mapping to develop deep, proprietary insights in target industry sectors. 3. Monitor target ecosystem for cyclical opportunities and structural shifts. 4. Align internal interests, e.g. provide performance-based compensation tied to origination metrics. 5. Divide and conquer. Assign responsibility for key relationships. Focus team by sectors/stages/structures. Consider dedicated origination professionals. 6. Centralize data and become an Information sponge. Install a CRM system. Record emails, phone numbers, the notes you take in meetings, and everything else you can about the people you know. 7. Develop a network with limited overlap. Focus on building relationships with people who do not know too many of your competitors, or know too many of one another. 8. Take control of your virtual presence. Make sure that when people look for you online, which they will, your image is both accurate and flattering. Keep your profile updated. 9. Join the in-person and virtual communities where your target market lives. Once you have joined one group, ask the members where else they connect with like-minded people. 10. Take a leadership role. Market yourself as the go-to co-investor for target sectors and geographies by developing proprietary insights, a deep network of key partners and talent, and other assets. Sell value add to entrepreneurs and key “peer” firms and actively drive syndicate creation. Write a blog to cover your domain, and perhaps create a virtual community around your unique interests. Ten Simple Steps to Improve Your Deal Origination
  100. Signals Network Next StepsSocial MediaIntro TraditionOrg Chart © 2016 David Teten. More at teten.com Any questions ? slides at teten.com/deals Sign up for the mailing list at teten.com @dteten
  101. Signals Network Next StepsSocial MediaIntro TraditionOrg Chart © 2016 David Teten. More at teten.com A representative of ff Asset Management, LLC d/b/a ff Venture Capital (“ffVC”) is providing this presentation for informational purposes to the intended audience. Nothing in this presentation shall constitute an offer or solicitation with respect to the purchase or sale of any security in any jurisdiction nor should anything in this presentation form the basis of, or be relied upon for, making any investment decision. Nothing in this presentation constitutes professional and/or financial advice of any kind (including business, employment, investment advisory, accounting, tax, and/or legal advice), nor does any information in this presentation constitute a comprehensive or complete statement of the matters discussed or the law relating thereto. This presentation and the information contained herein are provided “AS IS”. ffVC makes no representation or warranty (express or implied) with respect to the information contained herein (including, without limitation, information obtained from third parties) and expressly disclaims any liability based on or relating to the information contained in, or errors or omissions from, these materials; or based on or relating to the recipient’s use (or the use by any of its affiliates or representatives or any other person) of these materials; or based on any other written or oral communications transmitted to the recipient or any of its affiliates or representatives. ffVC undertakes no duty or obligation to update or revise the information contained in this presentation.

×