Balanced investing could have multiple interpretations, but what does it actually mean? For us as investors we believe a balance between the goals of business owner and private capital source generates the best returns for each. How do we put this balance into our investments? Focusing on five critical areas helps lead our decision making and operational enhancements:
1. Sharing Expertise
Every business must have a smart operator who understands what skills are needed for success in their industry. And that smart leader must continue contributing their expertise to the business even after they have sold, rolled some equity, or taken on a new financial partner. At the same time, the new private capital source must also add value. The business can leverage their experience around building a board, managing an acquisitions pipeline, our forming a sales organization. A “dumb” check helps nobody. To find success, leverage the expertise from both management and investors to scale.
2. Maintaining an External Eye
Business owners often get bogged down by all the daily tasks for their business. It is challenging to be objective and think about strategy or ask tough finance questions when you are on the phone with customers or installing new technology. A good private capital partner will add value by looking at the current state with a fresh and external eye. They now have a role to play as part of the team and, as Jim Collins wrote, “get the right people on the bus, the right people in the right seats,” and leverage their outside perspective.
3. Fostering a Healthy Debate
Owners and investors both need to value the idea of continually raising questions, and sometimes asking very hard questions. Things an investor has done in the past may not work for every deal, but they should question things that differ from their experience. Owners should avoid being complacent and similarly question every process even if the correct answer is to maintain the current approach. Do not be afraid to foster a culture of debate with a goal of finding the best answer based on the data, rather than deciding who is wrong or right.
4. Aligning Incentives
Everyone involved in a transaction needs to be focused on achieving a positive future outcome. Whether that takes the form of an exit, recapitalization, or continued growth, the dream of a “big check” should be meaningful to both business leader and capital provider. The most success we have seen comes when the founder, investment team, and other key management team members all have skin in the game either via direct equity ownership or other incentive structures. Doing this creates a bigger pie for everyone, and tying individual payoffs to the combined company growth means everyone works toward the same goals.
5. Crafting a Shared Vision
A good future outcome is highly unlikely if the investors are targeting a different type of exit or time horizon than the CEO and management team. Going in separate directions will lead to confused reporting, bad hiring decisions, or contentious board meetings. To be successful you must have a shared vision that is crafted by all parties. Everyone must jointly decide how to get from today to where the business wants to go, and then continue to reevaluate as the company makes progress. Avoiding this will stifle growth and could ultimately damage the partnership.
Each of these five areas must be considered to truly balance the investment and partnership goals between business owner and private capital provider. Balanced investing can be achieved so long as everyone involved gets on the same bus heading towards future success.
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