The business landscape in 2023 and beyond can be overwhelmingly competitive — and that’s where private equity (PE) firms can make a difference. Over the past few years, private equity value creation has become a critical business contributor. An expert private equity firm can provide value and capital growth for a wide range of business models and companies. PE firms benefit businesses of all shapes and sizes, from local tech start-ups to global corporations.

The total global private capital generated by private equity firms reached $1.3 trillion in 2022, according to the latest data from Preqin. Add that sum to the capital generated by PE firms from 2018 to 2021, and we get an impressive $6.4 trillion raised over a five-year period. To fully comprehend the implications of the value of private equity in a company, it’s important to first understand what private equity is, how it creates value, and what it means for businesses and industry sectors in 2023 and beyond.

In this article, we’ll discuss the following points about private equity value creation:

• How Private Equity Works
• The Private Equity Deal Process
• The Main Mechanisms of Private Equity Value Creation
• Private Equity Value Creation in 2023
• The Impact of Private Equity on Software and Technology Companies

How Private Equity Works 

Private equity is a source of investment capital that refers to the ownership or interest in an entity that isn’t publicly listed or traded on a stock exchange. PE firms take capital from investors and raise funds. They use their capital to invest in and acquire businesses. Depending on their investment philosophies, PE firms can bring value beyond the monetary to companies they invest in and acquire, such as:

• Industry knowledge and connections
• Talent acquisition
• Strategic direction and guidance
• Operational expertise
• Expanded reach and market
• Capital injection, business growth, and overall profitability

The primary motivation for businesses who partner with PE firms is a positive return on investment (ROI) — this can be achieved with private equity firms, which can yield favourable returns for shareholders. Private equity usually comes with an investment horizon of between 4 to 7 years — meaning PE firms are focused on investing in companies to provide substantial returns in a long-term time frame. As such, PE firms usually only invest in companies they see great potential in.

The Private Equity Deal Process

Typically, the private equity investment process involves four key stages. Not every PE deal follows this exact process, and there are a lot of different steps involved in each stage, but if you’re approaching or considering a private equity deal, this is what you can expect:

1. Sourcing— when the firm identifies the businesses for investment. PE firms often choose a winning sector early in its development or an underperforming company they plan to build up.
2. Acquisition— when the firm acquires the business. A non-disclosure agreement (NDA) is signed, and due diligence is conducted, after which an investment proposal and a non-binding letter of intent (LOI) are presented. An internal operating model and a preliminary investment memorandum are created and reviewed.
3. Management— the firm actively manages the business to increase value, using its knowledge, leverage, financial strategies, and connections.
4. Exit— after a period of time, usually between 4 and 7 years (depending on the profits and agreed holding period), the firm sells the business for a significant profit. The time in which the funds are returned to investors is known as the harvest period.

The Main Mechanisms of Private Equity Value Creation

Each firm may operate differently, but these are the three key areas that private equity firms focus on for value creation in a company:

Operational Efficiency

Using their industry knowledge and expertise, PE firms manage businesses by improving their operational efficiency. Reducing costs and optimising resources can increase the business’ overall profitability.

Strategic Growth

By identifying and actively pursuing growth opportunities, PE firms can expand the business to new markets, develop new in-demand products, and pursue further strategic acquisitions. For example, a software company could partner with a PE firm to expand into additional geographical locations, boosting sales and driving revenue growth.  

Financial Engineering

PE firms optimise the capital structure of a business through financial engineering and debt leveraging. They can also improve shareholder value through share buybacks or dividend payouts. PE firms can also source deals by building relationships with mergers and acquisitions intermediaries and investment banks to expand and manage their portfolio companies.

Private Equity Value Creation in 2023

Private equity firms continue to source, manage, and raise assets and sums of incredible value. There were $11.7 trillion worth of private market assets under management (AUM) by the end of the 2022 financial year. Assets under management account for the total value of assets managed by a private equity firm, including the assets that PE firms invested in and the assets they raised from investors. The $11.7 trillion sum was an 8.4% increase from the AUM held in 2021 and a considerable increase from the assets held by private equity (PE) firms in 2019, which was just $3.9 trillion.

As we advance towards the end of the 2023 financial year, the future of private equity is expected to grow further. The return on investment for the average business partnering with a PE firm is also expected to remain strong. Even though private equity assets experienced a slowdown in the second half the 2022 financial year, the overall trends still demonstrate substantial growth at noticeably rapid rates.

As the business world grows more challenging — for newer businesses and long-standing companies alike — private equity firms pose more relevant and lucrative business opportunities than ever before. Thanks to the increased globalisation of the market, the growing prevalence of technology, and the rise of alternative asset classes such as hedge funds, real estate, and private equity, there are infinite opportunities for private equity firms to create value in a company. This makes PE firms an ideal solution to the struggles and challenges of the 21^st century economy.

The Impact of Private Equity on Software and Technology Companies

Private equity firms — especially in recent years — play a prominent role in economic growth. The value created by private equity firms drives business expansion, creates jobs, and stimulates innovation through investing in businesses with novel technologies and business models. The entire cycle of a private equity deal can generate large returns for investors and significant capital growth for the company.

Moving ever further into the 2020s, private equity firms contribute significantly to the growth of the software and technology sector. A large portion of the assets under management over 2022 by private equity firms were from software companies — and almost 30% of all global buyout deals came from the technology and software sector (private equity value’s most significant contributor over the past few years). Software as a service (SaaS) is a particularly profitable business model that benefits from private equity.

By funding capital for start-ups and established companies, PE firms can innovate, scale, and compete on a global scale, driving advancement, industry consolidation, and business expansion.

Experience Private Equity Value Creation with Teoh Capital 

In 2023, private equity is one of the most significant contributors to economic growth — especially from software and technology businesses. In the first quarter of 2023, tech-focused deals comprised about 50% of all PE activity by value. If you want to be a part of this value-based growth, consult Teoh Capital. We are the leading private equity investment firm in Sydney, Brisbane, Melbourne, and more locations across Australia, investing in growing software businesses and long-stand brands.

With decades of success growing technology businesses, Teoh Capital prioritises sustainable growth over ‘growth at all costs’. We’re a family-run business that offers unbeatable certainty and transparency, with a flexible investment structure that promises capital in and capital out, making us the best choice for value creation in a company. Reach out today to work with our founding family’s expert minds and experience enduring growth, efficient management, and permanent capital.

Private equity firms invest in companies to enhance their value and improve their prospects for capital growth. Many firms invest in growing businesses and long-standing brands, but one often overlooked investment target is family businesses. Family businesses run with long-term intentions and a strong entrepreneurial spirit. They build strong customer relations and employee loyalty, making them an attractive investment opportunity for private equity firms.

Advantages of Family Businesses for Private Equity Firms

Family businesses are focused on independence, company culture, and values. They are also known for being passed down from generation to generation, offering the long-term stability investors often look for. Private equity firms can either acquire the family business as a whole or invest in shares while the owners maintain management positions.

Some examples of family businesses that benefited from private equity investments include:

• Dr Martens, an iconic footwear brand, was owned by family company R Griggs. The British brand was acquired in 2014 by private equity firm Permira. It has enjoyed worldwide success and attention and, in 2021, made its debut on the London Stock Exchange with a value of £3.7 billion.
• Dollar General, a discount retailer, was initially called J.L Turner & Son, run by a father and son in Kentucky. In 2007, the rebranded Dollar General brand was acquired by private equity investors. In 2019, Dollar General’s American revenue hit $27 billion.
• Boost Juice, an Australian juice brand founded in Adelaide, received an investment from US-based private equity firm The Riverside Company in 2010. Their shares were then bought by another private equity firm called Bain Capital in 2014. The Boost Juice founders formed a holding company called Retail Zoo to acquire and manage other food chains like Betty’s Burgers. In 2019, Retail Zoo was valued at just under $500 million.

Given the success of other private equity investments in family businesses, it’s worth considering the benefits given to both parties involved in the transaction. Private equity firms like investing in family-owned businesses for many reasons, including the following:

1. Consistent Cash Flow

Family businesses can generate consistent cash flows through their commitment to quality products, customer service, efficient operations, and a loyal customer base. The main attraction for private equity firms is the untapped potential the cash flow can generate if the business receives more capital.

2. Familiarity with Local Market

Family businesses usually have a strong understanding of their local markets. They provide a competitive advantage for private equity firms alongside valuable insight that can inform future growth strategies and investment decisions.

3. Long-Term Vision and Stability

Private equity firms usually seek to promote lasting value in their investment choices. These values line up with the vision and stability of family businesses. Private equity can secure the legacy of the company. While family businesses are usually passed between generations, they often only survive up to 2 or 3 generational transitions. Family businesses can successfully change ownership by approaching or being approached by private equity firms, ensuring the company continues and their employees continue their careers.

4. Strong Brand Equity and Customer Loyalty

Family businesses are known for strong brand equity and customer support. They establish a loyal clientele over the years through their commitment to high-quality products and intimate service. Brand strength is vital for private equity firms, which value expansion and creation. Firms can maintain the company reputation while building upon it and reaching broader markets.

5. Established Relationships and Networks

Family businesses have usually cultivated relationships and networks in their respective industries. Often, these networks can be of use to private equity firms, who are looking for valuable resources, potential partnerships, and plentiful market opportunities that can grow and enhance the company’s competitive advantage. Additionally, private equity firms can develop a proper rapport with the business owners. The founder or family usually maintains at least partial ownership, so they can create a relationship with the firm and work together to build the company.

How Family Businesses Benefit from Private Equity

When a private equity firm invests in a family business, both parties receive lasting, impactful benefits. The family business often has a choice of how involved they want to be and can reap the following benefits from the equity firm:

1. Retaining Ownership

Many private equity investors keep family members in key management roles. The advantages that family business structures offer them mean they are often willing to purchase less than 100% of the actual business, allowing the family members to retain ownership and influence. This will enable them to remain involved in their livelihood while reaping all the other benefits of the investment.

2. Wealth Diversification and Capital Growth

Partnering with a private equity firm provides a family business with access to a large body of growth capital that can imbue the company with the means to reach its true potential. Growing and enhancing the business means satisfying the employees, customers, suppliers, and stakeholders — these are all outstanding results. Private equity investment also diversifies the business’ wealth by generating liquidity for the team. This reduces the risk associated with tying the family members’ assets and net worth to the business.

3. Navigating the Business World

The most considerable imbalance in the relationship between family businesses and private equity relationships is the level of experience in managing larger enterprises. Still, the best private equity firms will help the owners to understand and navigate this complex landscape. As a small company becomes more prominent, the owners can build upon data analysis, workflow management, and financial sophistication. With the level of experience private equity firms have, they provide expert help and advice to drive the company onward.

Strategies for Private Equity Firms and Family Businesses

When a private equity firm and a family business join forces, it’s up to both parties to ensure their collaborative success. By incorporating the following strategies, private equity firms can enjoy success and growth from their investment.

1. Establishing a Strong Rapport

While not a strictly businesslike process, a strong relationship needs to be built between the two parties. Transparent communication and demonstrations of commitment are what foster strong partnerships.

2. Researching and Identifying Growth Areas

Private equity firms should identify critical areas for growth and improvement within the business. They can also bring industry experts and advisors to contribute to business decisions and company performance.

3. Rescaling the Business Structure

Private equity firms can establish management roles, distribute responsibilities, and ensure accountability. If the owners retain influence, they can work with the firm to improve the business’s operations. Implementing a formal structure can help move the company from a family-centric management style to a larger-scale, professional operation.

4. Maintaining the Family Values

While changes are inevitable, it’s important to balance them with tradition and the core of what made the business special in the first place. The business must preserve the family values and culture throughout all the changes and improvements. By respecting and incorporating the company’s unique values, the private equity firm can ensure continued success and customer loyalty.

Wrapping Up

Family businesses make an attractive investment opportunity for private equity firms. Tapping into the vast potential of family businesses can help private equity firms create lasting value in their investments and reward them for their time and money. Meanwhile, family businesses benefit from the actions and aid of private equity firms, making a robust and value-based partnership that is too often left untapped.

There’s no doubt about it – software as a service, or ‘SaaS’, is flourishing, becoming one of the most prevalent business models to emerge over the last decade. And as more tech-businesses continue to develop cloud-based solutions, many require funding for product development, marketing, and the resources necessary to scale. The amount of capital raised by funds for tech companies in 2022 reached an unprecedented high of $162 billion, more than double the $73 billion recorded in 2020 (Pitchbook, 2023).

The surge in investments for SaaS companies has normalised various types of funding for tech companies – start-ups and long-standing brands. SaaS companies can benefit from traditional funding methods like Venture Capital and Private Equity and revenue-based financing routes like crowdfunding.

With the diversity and range of SaaS funding options, choosing how to grow and expand your business can be overwhelming – on top of what can already be a complicated process in developing a SaaS product. In this article, we’ll take a look at the following points which will help you decide on the right funding option for your business:

• Types of SaaS Funding Options
• How to Choose the Right SaaS Funding Option for Your Business
• Tips for Successfully Raising SaaS Funding
• Common Mistakes to Avoid When Raising SaaS Funding

Types of SaaS Funding Options

Venture Capital (VC)

Venture Capital is a form of financing investors provide to start-up companies in exchange for equity. VC funding provides SaaS businesses with rapid capital growth. These businesses can use this funding to grow and develop their operations successfully.

Venture Capitalists are usually wealthy investors, investment banks, and large financial institutions. They bring valuable advice and industry connections to the business they fund. Unfortunately, Venture Capitalists often ask for a high return on their investments. This can put a lot of pressure on SaaS businesses, who may feel they must be hugely successful in a relatively short time to make good on the VC’s investment. The VC’s demands and the business’s structure may also generate conflict.

Private Equity

 Thanks largely to the emergence of the Silicon Valley tech bubble, private equity investing is now a major proponent for SaaS funding.

 Private Equity is an alternative form of investing in companies. Private equity firms invest in businesses that have a proven record of success and a strong potential for capital growth. Private equity investors usually involve themselves in company management and operations, as they have an interest in making the business as profitable as possible to make good on their investment when they eventually sell the company.

Private Equity firms usually have high capital, so they are an excellent source of large funds. The high level of active involvement that PE firms take can also help to increase efficiency in company management. However, PE firms may expect returns on their investment within a certain time frame and require a significant ownership stake in the company. PE investments are long-term solutions involving a series of financial models that leverage debt to increase returns.

Angel Investors

Angel Investors invest capital in exchange for equity ownership. Angel Investors are usually high-net-worth individuals who invest from their own pocket rather than investment funds. They may also provide mentorship to the company’s team.

Like Venture Capitalists, Angel Investors can provide valuable advice and funds to businesses, especially those just starting. However, they may be less knowledgeable in the industry and have fewer connections than Venture Capitalists. They may also be less willing to take risks on companies that have an uncertain future.

Crowdfunding

SaaS businesses can raise capital through groups of individuals on online platforms such as Indiegogo, SeedInvest Technology, and StartEngine. The rules of these platforms may fall into one of four categories:

• Equity crowdfunding — investors provide you with funding as long as you sell them part of your business
• Donation crowdfunding — a simple donation page where nothing needs to be paid back
• Debt crowdfunding — businesses can borrow money from individuals and pay it back with interest, like a business loan
• Rewards crowdfunding — funders are offered products and rewards in exchange for their donations, with different tiers for more expensive donations and greater rewards

Crowdfunding can create a valuable connection between the funders and the business and provide the company with a large amount of capital. However, crowdfunding efforts can be challenging to manage and promote. Additionally, due to their public nature, they risk exposing the company’s intellectual property to competitors.

Self-Funding

Companies may use their own personal savings, credit, or loans to generate capital. This can be a worthwhile investment for companies with low costs and few employees. It also gives the company complete control over its business. It also eliminates the debt that may accrue from the other funding options. The downside is the high risk of investing personal finances into professional ventures. It may also limit the company’s potential capital growth if the amount invested is too low.

How to Choose the Right SaaS Funding Option for Your Business

With all the different options and their respective pros and cons, reaching the right decision takes work. Make sure to first and foremost identify your business goals and funding needs. What do you need capital for, and how much? What are the costs of your operations, products, marketing, and workforce? Once you have an estimate of how much you need, you can narrow down the wide range of options.

Next, understand the advantages and disadvantages of each funding option, as detailed above. Think carefully about the level of investor involvement, debt or repayment terms, and overall cost and effort.

Some funding options come with more significant risks than others. Depending on your business’s risk tolerance, you may be safer going with a Private Equity firm rather than a Venture Capitalist. Depending on how much management control you desire, crowdfunding or personal funding could help you to maintain autonomy and creative control. Make sure you consider not just the risk to yourself and your business but the risk that the investor(s) will be exposed to by funding you.

When in doubt, seek advice and guidance from industry experts. If you have access to financial advisors or lawyers, they can provide you with helpful and valuable insight that can help you to make a safe and informed decision.

Tips for Successfully Raising SaaS Funding

Before you approach anybody or invest money, building a robust and detailed business plan is essential. Outline your products or services, target market, and growth strategy.

Once you have a plan, you can identify and reach out to potential investors or consider other funding options. Make sure investors align with your business goals, ethic, and values.

While you’re doing this, make sure to network and build relationships in your industry. This helps you gain both visibility and credibility.

Effectively communicate your business’s value proposition to investors. Set your business apart from competitors and run with your strengths; prove there is a market for the products or services your business will provide.

Following these tips will increase your chances of raising the funding you need for your business to grow and profit.

Common Mistakes to Avoid When Raising SaaS Funding

As mentioned previously, having a firm plan is crucial when considering raising funding for your business. Raising SaaS funding is a difficult, complex process that can only be completed with adequate preparation. A common mistake is to focus too much on funding options before making a solid business plan.

Another common mistake to be avoided is overlooking the importance of due diligence. Before any investment can be made, a potential investor must comprehensively investigate the business and evaluate its financial, legal, and operational structure. However, as its key purpose is to identify and assess the risks associated with the investment, due diligence falls to both the investor and the business. Both parties must ensure they are content with the risk and prepared to take responsibility should there be any issues.

It’s also a mistake to focus solely on raising funds. Even if your business receives a significant investment, you can only make sufficient returns on that investment if you have a sustainable and profitable business that can generate long-term interest and value. Before raising funds, put in the hard work to ensure your business will be successful.

Finally, it’s essential to communicate effectively and frequently with investors. They want to know what you’re doing with the money they raised for you. Provide regular updates and honest, transparent reports on business performance and progress. Avoid poor or dishonest communication; this is an unfair way to pay them back for their trouble.

Final Thoughts on SaaS Funding and Where You Can Start

It’s important to choose carefully when deciding on SaaS funding for your business. Evaluate your business goals, funding needs, and risk tolerance, and consider the pros and cons of the different fundraising methods. Be sure to seek expert advice and guidance rather than rushing into a plan. The source of your financing can make or break your business, so prioritise a solid business structure and strategy with plans A, B, C, and D so you’re prepared should anything go wrong.

We hope this article has helped you in your search for funding, and we wish you the best of luck with your business. The future of SaaS funding is bright and will only continue to get brighter as the demand for software-based services grows. Here at Teoh Capital, we invest in developing software businesses as well as long-standing brands, so if you think we can help you with your business, get in touch. Remember to stay prepared, informed, and adaptable, so your SaaS business may find capital growth and success in the modern world.

Mergers and Acquisitions (M&A) transactions are a common and often essential component in corporate growth. Empowering the rapid expansion and scaling of companies through strategic partnerships, private equity firms play a crucial role in facilitating M&A transactions for private companies.

In this article, we’ll delve into the nuanced role that private equity firms play in M&A transactions with insights extending beyond the obvious aspects of brokering deals and financing. From identifying and evaluating acquisition targets, to providing operational experience and managing the complex process of post-acquisition integration, we’ll examine the full spectrum of private equity’s involvement in M&A transactions.

Understanding Merger and Acquisition Transactions

Before we dive into the nuances of M&A transactions and private equity, let’s take a moment to the definition, types, and benefits of M&A transactions on a broad spectrum.

Definition of M&A transactions

Mergers and Acquisitions transactions or M&A transactions simply refer to the consolidation of two of more companies into a single entity. The process may involve the merger of two companies that then form a new company, or an acquisition whereby one company will absorb all of the assets and liabilities of another company.

M&A transactions are size-agnostic and can occur with companies of any size. From small businesses to multi-national enterprises, mergers and acquisition transactions are typically driven by the intention to capture new markets, access new technologies, or simply under the guise of financial reasons.

Types of M&A transactions

Mergers and Acquisitions (M&A) transactions be classified into a number of different categories.

Acquisition: An acquisition merger is a straightforward merger where one company simply buys another company. Acquisitions may take the form of a stock purchase, asset purchase, or a combination of both. Depending on the nature of the merger, acquisitions may be classed as either friendly or hostile.

Merger: A merger is when two companies combine to form a single entity – whether it be two companies in the same industry, two companies in the same supply chain, or two companies in completely different industries.

Bolt-on Acquisition: A bolt-on acquisition refers to when a company is added by a private equity firm to one of its platform companies. Generally, this will occur when a private equity firm has partnered with a large company in a specific industry, and the PE firm then facilitates acquisition growth through bolt-on acquisitions.

Benefits of M&A transactions

M&A transactions offer a myriad of benefits for companies. Benefits from mergers and acquisitions can be both strategic and financial and help companies to expedite growth, achieve long term success, and profitability exit their business. Some other key benefits of M&A transactions include:

• Cost savings through operational optimisation and cost consolidation
• Diversification of both revenue streams and products or services provided
• Access to new technologies
• Improved financial management and bottom-line performance
• Rapid market expansion opportunities

Through M&A transactions, companies can effectively eliminate growth pain-points, streamline operations, and increase business profitability.

The Role of Private Equity Firms in M&A Transactions 

The role of private equity in M&A transactions often involves financial and operational support, identifying new opportunities, and managing the intricacies and nuances of the M&A process from start to finish.

Financing M&A deals

Private equity firms play a critical role in financing M&A deals by providing the upfront capital required to complete transactions. With access to significant funds and a comprehensive understanding on the process of financing M&A transactions, PE firms are well-positioned to support companies that are looking for growth opportunities through mergers and acquisitions.

Providing operational expertise

In addition to financial resources, private equity firms bring operational expertise to the table. By identifying operational inefficiencies and helping companies to streamline internal processes, PE firms play a critical role in ensuring that M&A transactions deliver the best outcome for both the acquiring and the target companies.

Identifying and evaluating acquisition opportunities

Private equity firms play an important role in identifying and vetting acquisition opportunities for their portfolio companies. Market knowledge and industry expertise means that PE firms are able to identify target companies that are well position for growth.  Throughout the process, PE firms undergo an extensive due-diligence process to evaluate the financial, operational, and strategic fit of the target company.

Managing post-acquisition integration

PE firms play an important role in facilitating M&A transactions, particularly leveraged buyouts. By applying a track record of industry experience and expansive resources, PE firms can help to finance the acquisition and add value to the target company through operational improvements and proven growth initiatives.

Private Equity Firms and M&A Deal Structuring

Due diligence process

For private equity companies, the due diligence process is a critical step in M&A transactions and involves a number of key steps, including:

• A thorough audit of a company’s financial, operational, and legal history
• A comprehensive market assessment and competitive analysis to understand the unique selling proposition (USP) and market position of the target company.
• Evaluating the management team and key personnel of the target company.
• Identifying risks, liabilities, and other factors which may impede immediate or future successes.

Private equity firms bring significant experience to the due diligence process. Leveraging a deep understanding of M&A transactions, PE firms are able to provide valuable insights and recommendations to their portfolio companies.

Negotiating terms of the deal

When it comes to negotiating the terms of a deal and navigating the complex paperwork that is involved, the benefit of private equity support comes to the fore. PE firms bring a wealth of experience and expertise to the negotiating table and help companies to structure deals that are in their best interests. Private equity firms will use their negotiating experience to:

• Identify key terms and conditions to be included in the agreement
• Advise the company on any risks and benefits involved with different deals
• Develop a negotiation strategy that protects the interests of both parties

The role of the private equity firm is to protect the best interests of their portfolio companies and ensure that the terms the deal are favourable for them, but fair for both parties.

Managing risk in M&A transactions

M&A transactions are fraught with risks and obstacles to overcome. PE firms bring a wealth of experience to the transaction and are able to effectively evaluate and mitigate risk throughout the process in a way that protects their portfolio companies.

Final Thoughts

Private equity firms play a vital role in the process of M&A transactions, bringing a wealth of experience, financial resources, market knowledge, and risk management to the table. Working closely with their portfolio companies and protecting their interests, PE firms help to manage the minutia of the M&A process and deliver value for all parties involved.

Finding investors for your business can be a daunting task. From meeting with potential backers, to preparing pitch decks and expanding your professional network, there is a lot to consider.

Whether you’re in the early stages of a new business, you’ve hit a plateau in growth, or you’re seeking outside investment opportunities that can help you take things to the next level, finding the right type of investor for your business is essential.

In this article, we’ll look at how you can find investors for your business, the different types of business investors, and the steps that you need to take to secure the right investment for your business.

Why investors are important

The notion of investors and equity financing has evolved rapidly over the last decade. Due in no small part to the mainstream fascination with ‘unicorns’ and start-up culture in the tech bubble of Silicon Valley, more business owners are now looking to outside investment to facilitate growth – and it’s not just tech start-ups.

Investors play a critical role in funding business growth by providing the capital and professional resources that help them to expand at a faster pace that they would be able to with their own capital. Without access to capital, it can be difficult for businesses to hire employees, purchase critical equipment and inventory, and invest in the appropriate marketing channels.

In addition to providing capital, investors can also bring valuable industry-experience, connections, and professional resources to the table. For many businesses, access to new customers and partners, as well as the ability to connect with key industry players and influencers through investors is an invaluable piece in the growth puzzle.

 

Identifying your target investors

If you’re looking to go down the path of seeking investment for your business or start-up, then it’s important to determine the types of investors that you are looking to attract. Businesses and entrepreneurs should remember that their business is not going to appeal to all types of investors, which is why it’s important to identify their target audience for investment.

Different types of investors

Angel Investors

Angel investors are high-net worth individuals that invest in small companies and start-ups in exchange for equity in the company. According to the latest data from the Center for Venture Research at the University of New Hampshire, angel investments in 2020 in the United States totalled $25.3 billion across 64,480 entrepreneurial ventures.

Unlike a venture capital firm that relies on an investment fund to make business investments, angel investors make business investments from their own hip pocket. When compared to venture capital firms, angel investors are often more patient with entrepreneurs and open to taking a long-term approach to investments. However, like VC firms, angel investors want to see a clear exit strategy and path to profitability for their investments. 

Venture capital investors

Venture capital firms are investment companies that provide funding to start-up business that are demined to have ahigh growth potential. In exchange for their investment, VC firms will typically take an equity ownership in the company.

Venture capital firms will typically invest in early-stage companies that are not profitable but are instead buoyed by their potential to disrupt an industry and become profitable in a relatively short space of time.

According to the latest data from the National Venture Capital Association (NVCA), venture capital investments reached a staggering $329.9 billion across 17,054 deals in 2021 in the United States – roughly double the previous high that was recorded in 2020.

Some of the types of businesses that venture capital investors may choose to invest in include:

• Tech companies
• Software companies
• Internet start-ups
• Energy and clean tech companies
• E-commerce
• Agriculture and food

In addition to capital, VC firms also provide valuable resources such as mentorship, guidance, and professional networking that can help to fast-track growth.

Private equity firms

Private equity firms will typically invest in privately owned companies with a proven track record of success with the potential for significant growth. While some mistakenly use venture capital and private equity as interchangeable terms for private investment, there are some key differences that separate them.

Unlike venture capital firms that take a high-risk, high-reward approach to start-up investments, private equity firms tend to opt for ‘safer’ businesses with a proven market with the potential for significant growth with the right investment.

Some of the types of businesses that private equity firms invest in include:

• Software and technology companies
• E-commerce, retail, and consumer goods
• Manufacturing and industrial
• Healthcare and Pharma companies

Just like venture capital firms that typically have a target niche, PE firms invest in sectors where they have the knowledge and professional resources to help their portfolio companies to scale. Private equity firms will usually take a controlling stake in a company to make them more valuable before selling them for a profit at a later date.

Crowdfunding 

Crowdfunding has become an increasingly popular funding channel for small businesses and start-ups that are looking to gain a loyal throng of supporters while raising early-stage capital. The latest data from Statista shows that the crowdfunding segment is projected to reach $1.1 billion USD in 2023 and continue to grow at a rate of 2.46% over the next five years.

The emergence of crowdfunding sites Kickstarter and Indiegogo mean that new businesses can now circumnavigate the traditional route of heading to the bank for a business loan. Crowdfunding will typically be structured in one of three different ways:

Rewards-based: Business offer rewards such as product discounts or early access to products when crowdfunding investors back them at an early stage.

Equity-based: When businesses offer equity in the company in exchange for financial backing.

Debt based: Businesses borrow money from a crowd of investors and then pay back the money with interest when the business becomes profitable.

Family and friends

As the name would suggest, family and friends’ investors are those that invest money into a business that is started by someone that they share a personal connection with.

According to a recent study by Clutch which interviewed 501 business founders in the United States, almost one in four (22%) of all founders took a loan or investment from their family or friends in the first 3-months of starting a business.

These types of investments are usually motivated by the desired to support a family member or friend and their entrepreneurial vision, rather than with the sole goal of financial gain.

Institutional investors

Institutional investors accrue the funds of investors and invest those funds on behalf of their members. Institutional investors invest in a variety of different assets including stocks, real estate, bonds, and private companies.

Some of the private companies that they might invest in include:

• Banking companies
• Insurance companies
• Tech start-ups
• Early-stage companies

Institutional investors may also invest directly in companies through the secondary purchase of shares or by participating in private funding rounds.

How to connect with potential investors

Once you’ve determined the type of investor that you are looking to attract, the next step is to put your business in front of those investors. Depending on the type of investor (refer to the list above) your method for meeting investors will be different.

Some of the ways that businesses can connect with potential investors include:

Networking events: conferences, trade shows, and other events that present opportunities to mingle with potential investors and discuss your business.

Online: Websites like Gust and AngelList have been specifically setup to allow business to connect with angel investors and venture capitalists. Outside of these platforms, professional networking sites like LinkedIn can open new doors and facilitate encounters with the right kinds of investors for your business.

Reach out to VC/PE firms in your area: Most Venture Capital and Private Equity firms in your area will have a dedicated section on their website where businesses can pitch their business or organise a meeting. Google “Private Equity/Venture Capital + your location” to find local companies that may be interested in investing.

Crowdfunding platforms: If crowdfunding sounds like the right investment channel for your business, then platforms like Kickstarter and Indiegogo provide an easy-to-navigate platform that allows businesses to pitch themselves to the masses.

Referrals: Word of mouth referrals from your network can be a powerful way to get your foot in the door with investors. Reach out to entrepreneurs or businesses in your network to ask for referrals or recommendations on securing funding.

What an investor wants to know before investing

When it comes to private investing, investors will want to do their due diligence before putting their money on the line. Investors want to know key information about the company that they are investing in, the terms of their investment, future plans of the business.

Pertinent information that investors will want to know before investing includes:

Financial performance: A complete rundown on past financial performance, profit, growth, and operating expenses.

Business plan: A clear business plan helps investors to not only understand your business, but it also shows that you have taken the time to assess any obstacles that the business may face. Even for mature companies with a proven track record of profit, a business plan is an essential piece of information that potential investors will use to make decisions about funding and supporting your company.

Unique selling proposition (USP): When it comes to business, your USP is your competitive edge in the market. Investors will want to know the unique value proposition of your product offering and where it sits in the market.

Company management profiles: Investing in a business means investing in their management team, as such, investors want to know more about the management team and their track record for success.

How you plan to spend their investment: Depending on the nature of the investment, investors will want to know how their money is being spent and when they can expect a return.

Investment structure: Understanding their rights and obligations, what happens if there is a change in leadership, and how they can cash out (if required) are all important considerations for investors.

Exit strategy: Every business owner needs an exit strategy, and the same goes for investors. They will want to know what their exit strategy looks like and when they can expect to recoup their investment.

In addition to all of these points, investors will also want to know about the company’s valuation as well as projected return on investment.

Finding the right investor for your business

Connecting with investors that share your vision can be a challenging task, but, with a clear approach and understanding of what your ideal investor looks like, it can be done. By identifying your funding requirements and creating an air-tight case for investment with a compelling pitch, you can match your business with the right investor.

Private Equity (PE) and Venture Capital (VC) are two channels of investment that are often (incorrectly) used to describe private capital investments into companies at various stages of their business lifecycle. However, in spite of the confusion that exists, there are some very stark differences between private equity and venture capital investment.

Private Equity and Venture Capital firms invest in different types of companies at different stages of their business lifecycle, commit different amounts of money, and hold equity in different ways when they invest in companies.

Topic Overview

• Private Equity Overview
• Venture Capital Overview
• Well Known PE Backed Companies
• Well Known VC Backed Companies
• Similarities Between PE & VC
• Key Differences Between PE & VC
• Pros & Cons of Private Equity
• Pros & Cons of Venture Capital

Private Equity Overview

Private equity investing involves the investment and acquisition of privately owned companies. Private equity firms (like Teoh Capital) leverage funds from institutional investors or high-net-worth individuals to acquire and invest in privately owned companies.

Typically, PE firms will have a specialty or niche where they have proven experience. Depending on the nature of the business, this may involve improving the operational efficiency of a business, streamlining processes, identify waste and inefficiency, or even expanding the business into new markets. Through these actions, PE firms aim to improve increase profitability and drive bottom-line growth.

Private equity can be appealing to institutional investors and high-net-worth individuals for a number of reasons including:

• Potential for high returns: PE investing can be extremely lucrative. By acquiring a stake in established, already profitable companies and implementing proven strategies, PE firms can drive significant growth and, therefore, profitability for their investment.
• Diverse investment portfolio: As we have seen in the second half of 2022, traditional investment markets can be extremely volatile. By diversifying investment into established, profitable companies, PE firms can effectively circumnavigate traditional market volatility.
• Control & market influence: Private equity investors have significant control and influence in the companies in which that invest. This control means that they can shape the direction of the company and make tough business decisions that business founders and internal management teams may struggle to make.
• Proven strategies: As we mentioned at the top, niche experience means that PE firms can often (quickly) identify operational inefficiencies and implement proven techniques to streamline business operations and maximise profitability.

Venture Capital Overview

Venture capital investing involves providing financial support for start-ups or growing businesses with the opportunity for large, long-term returns if they are successful. VC investing has become somewhat of a buzzword over the last decade with the runaway success of tech companies like Facebook, Airbnb, Uber. The bean-bag strewn offices associated with tech start-ups have become the unofficial imagery that many associate with VC investing.

VC firms will typically invest in businesses during the very early stages of their business lifecycle when they have a high potential for growth, in lieu of proven, profitable revenue streams. Venture capital investing involves a high level of risk as many start-ups do not achieve the same level of growth of success that is projected in those early days. The flip side of the ‘risk’ coin is that venture capital investment can yield significant ROI when successful.

Venture capital investment is a key source of funding for start-ups and small businesses that have a significant opportunity for growth but lack the capital to get things off the ground. VC funding provides businesses with access to capital and resources that facilitate growth at a stage where the business cannot rely on its own revenue streams.

Similarities Between Private Equity & Venture Capital

Like we mentioned, private equity and venture capital are sometimes used interchangeably to describe any type of private investment into privately owned companies. While we now know that this is not the case, there are a number of similarities between PE and VC that are worth mentioning.

Some of the similarities between PE and VC include:

1. Ownership status: VC and PE firms will typically invest in companies that are not publicly traded.
2. Due diligence: both VC and PE firms will do extensive due diligence on the companies that they invest in before making any sort of commitment.
3. Drive for profitability: both VC and PE seek to improve the profitability of the companies that they invest in through an injection of capital and resources
4. Role in the company: both venture capital and private equity firms will take an active role in the management of the companies that they invest in. This involvement ensures that their investments grow and make the best business decisions.
5. Niche focus: VC and PE firms will typically have an area of expertise such as tech, software, or finance.

Overall, private equity and venture capital investments are similar in the sense that they provide capital and access to resources in exchange for an ownership stake in a company. Once invested, both firms aim to maximise the profitability of their investment through operational and financial optimisation.

Key Differences Between Private Equity & Venture Capital

While venture capital and private equity companies share some similarities, there are some important differences that separate the two types of investments.

Some of the key differences between PE and VC include:

1. Stage of investment: VC firms will typically invest in companies at a very early-stage of their business lifecycle. Conversely, PE firms tend to invest in mature companies with established proof of concept in the form of positive revenue streams.
2. Level of risk: VC investment is high-risk with a high potential for return. Because these companies are usually in a “start-up” phase it means that they require a high-level of financial input to execute on their business strategy. On the other hand, PE firms deal with stable, mature companies with a proven track record of success.
3. Investment timeline: The investment timeline for VC and PE investment can be vastly different. Because VC investing means backing young companies, it means that the timeline for positive returns can be extremely long.
4. Level of involvement: VC investors will take a very active role in their investments providing support, guidance, and expertise to facilitate growth. PE investors will still provide these resources, but usually at a lower level.
5. Exit strategy: For VCs, the exit strategy will usually centre around an initial public offering (IPO) and taking their investment public. On the other hand, private equity firms will typically exit their investments following the sale of the company to another firm or a merger.

Private Equity (PE) vs Venture Capital (VC) – Which Is Best?

So, now that you know the differences between private equity investment and venture capital investment, you may be wondering which is the best type of investment model.

The truth is, there is no one-size-fits all answer to this question. The answer largely depends on the type of company that you have, the stage that you are at in your business lifecycle, and your long-term goal for the business.

As we covered above, PE firms and VC firms invest in businesses at different stages of their lifecycle. Choosing between PE and VC investment will come down to your business age, short and long-term goals. Both types of investment can be beneficial depending on the stage that your business is at, so it is worth applying the above information to your business model to see which type of private investment would be most suitable.

Private equity investing has increasingly entered the public consciousness over the last decade. Thanks largely to the emergence of the Silicon Valley tech bubble the advent of terms such as “Unicorns” to describe privately-owned start-ups with a valuation north of $1-billion, private equity investing has well and truly entered the mainstream.

According to the latest data from Preqin, the global private equity market surpassed 4.74-trillion USD at the beginning of 2021. Whether you’re an experienced investor or just getting started, this article will provide you with a solid foundation for understanding the basics of private equity and its changing role in the financial world by addressing the following:

• What is Private Equity?
• How Does Private Equity Work?
• What is the Goal of Private Equity?
• What is a Private Equity Firm?
• What is the Difference between Private Equity and Venture Capital?

What is Private Equity?

Before we jump into how private equity works, let’s first answer the question of “what is private equity?”. In simple terms, private equity describes an investment partnership where one companies buys and manages another company before selling it. Private equity firms will typically acquire a majority ownership stake in a company with the intention of using their experience and network to increase its value before selling it for a profit.

How Does Private Equity Work?

Private equity involves the acquisition of a private company or asset by an investment firm. Once the private equity firm takes control of the company, they work to increase value through various initiatives such as restructuring, introducing new product ranges, or expanding into new markets.

Private equity firms use their connections, experience, and marketing reach to improve the operational efficiency and profitability of the company that they invest in. Because they boast significant cash and personnel resources, they are usually able to expedite the process of expanding and growing an established business.

Businesses that need help scaling operations or are looking to expand without taking on additional debt will often seek private equity funding.

What is the Goal of Private Equity?

The goal of Private Equity investing is to generate higher returns for investors and the companies that they invest in. PE investing also allows investors to take an active role in company management and operations in order to extract the maximum value from their investment. This may include investors working across activities such as networking, day-to-day operations, marketing, or lead generation.

Private Equity deals are typically very flexible when it comes to structuring deals, which makes them attractive to seasoned investors. PE has become a popular investment vehicle for institutional and high-net worth individuals that are looking for higher returns and more control than typical, passive investment strategies.

By investing in private companies, investors have the potential for significantly higher returns than public markets, as well as access to unique and exciting opportunities that are not available in public markets.

What Is a Private Equity Firm?

A Private Equity Firm or a PE Firm is an investment firm that uses the funds of investors to purchase and manage other companies or assets that have the potential to generate revenue. Private equity firms will typically specialise in different verticals or types of investments.

By investing in companies at various stages of development and growth, private equity firms can generate returns for their investors by increasing the value of their investment (a company or asset). Private equity firms typically employ a range of highly skilled professionals such as bankers, analysts, or IT specialists that are responsible for deploying strategic solutions on behalf of their investors.

In addition to injecting capital, PE firms may provide management advice and access to other services or intellectual property that can help businesses to achieve success. Private equity firms will often specialise in a niche or area of expertise where they can leverage industry knowledge and solutions that can fast-track growth.

Private equity firms provide value for their investors and the companies that they invest in. Capital, knowledge, resources, and experience helps to make their investments more profitable, which is beneficial to their investors and the companies that receive investment.

Private Equity vs. Venture Capital – What’s the Difference?

Private equity and venture capital are two distinct types of investments. While the two terms are often used interchangeably to describe capital investment in a company, there are some important differences that set them apart.

Perhaps the greatest difference between private equity and venture capital is the level of risk that is involved in each type of investment. Venture capital is a high-risk investment in a young company, on the other hand, private equity is an investment in an established (3+ years) company with a proven track record of sales and profitability.

Private Equity Investment

• Established, cash-flow positive companies
• PE companies typically seek a very large or majority ownership stake
• PE makes profit are the companies increase profit

Venture Capital Investment

• High risk, young companies
• Companies are usually not profitable
• Typically focus on tech start-ups and young companies
• VC profit is achieved by selling their company share or when the company goes public

Final Thoughts

Ultimately, the success of a private equity investment comes down to careful analysis, sound decision making, and a commitment to predetermined goals.

Private equity firms provide an important opportunity for businesses that require capital and expert assistance to reach new heights. While the risks for investors are significant, the upside of PE investing can be significant and rewarding for both parties. Private equity offers a unique opportunity to unlock the full potential of an organisation through capital and expert guidance. For more information on the Teoh Capital private equity firm and our services across Sydney, Melbourne, and Brisbane, get in touch with our friendly team today.

Everything looks rosy and you’re ready to sell. This is the moment you’ve worked so hard for, and all the sacrifice is about to pay off. One or more potential buyers is knocking at your door, and you’re excited about what’s about to unfold.

Here are 6 common mistakes that people make when selling their software businesses.

Messing up the numbers

If you’re hazy on the details, you risk the buyer leading the discussion on market value, instead of you. Nobody knows your business as thoroughly as you do. Get clear on your baseline so you’re in a strong position to negotiate. Take into account your business’s financial, future and strategic worth. Don’t underestimate the power of your position within your industry. What is special about your business? It’s these things that increase your worth.

Not knowing what the buyer wants

Spend time talking with the buyer about what they’re looking for. Be curious about what they’ve accomplished and why they’re keen to invest in your business. Make connections between what you offer and how it may complement their existing structure. Get into their shoes and think strategically. What’s so attractive about your business? Why choose your company over a rival one?

Selling to the wrong person

This is similar to a marriage. You’re each coming into this arrangement with your own purpose and aspirations. You want the match to work on every level that counts, particularly when there are other people involved, like your employees and your customers. Take the time to properly understand the way your potential buyer works. Find out their plans for your company and assess whether they’re the best match. This is about more than sales price. It’s about your legacy. It pays to be cautious.

Taking too long to sell

When you’re riding wave after wave of success, it can feel like you’re living a business fairytale. You can forget that fortunes rise and fall and, if you’re not paying enough attention to the market, you can misread your timing. Your worth as a company depends on your financials, sure, but it’s also influenced by things like the state of the economy and industry, consumer trade habits and the production of goods.

Selling at the right time is about seizing opportunities. It’s about reading external circumstances and being alert to changing trends. Clinging on for too long can be detrimental in the long run, just selling too quickly can lead to regret. The right timing is about developing a clear strategy and honing your instinct.

Taking the first bid that comes along

Good early bids can seem quite tantalising. A bird in the hand, after all… But if there’s early interest, that can be a good sign of market competition, and it can be worth holding off a little longer. Competition from buyers gives you choice. Match the buyer with the ethos of your company, drive up your sales price, or both. Hasty sales can lead to seller’s remorse, and after all the effort you’ve taken to create the business you’ve got, it’s worth taking your time over this final hurdle.

Lack of clarity

Serious and experienced  prospective buyers will review the business thoroughly as you get closer to a deal. It is reasonable to require due diligence. Be transparent about what they’re going to find. It’s normal to have encountered difficulties along the way of funding and growing your business. It’s about demonstrating how you overcame them. Last-minute panic over hidden problems can spell disaster for the deal. Ensure your financials are trustworthy. Be clear on who owns what intellectual property. Before you go looking for investors, make sure you have everything in place legally.

It’s an exciting point that you’ve reached. Keep your feet on the ground. Be clear on your own expectations and know where you’re willing to compromise and where you won’t. You’re in control and the better prepared you are, the better the outcome for you, for your business and people, and for the new owners.

When it’s time to move on, you can feel excited about the next stage. You might be retiring, taking up an exciting career shift or starting another business from scratch. The urge to move on quickly can pull your focus away from important details. And these can lead to mistakes. Here are 7 things to look out for when you’re selling a software business.

Most prospective purchasers take longer than you expect

Buyers need to do their due diligence. Their initial excitement may morph into a thorough, process of dotting the i’s and crossing the t’s — and so it should. Ideally, they’ll want to discuss your activities, organisation, due diligence and business planning. This is important, but prioritise those buyers who can expedite due diligence, and who are focused on the present and the future, rather than an over-interrogation of the past.

Selling a business is a lot of work

This is a dance between you and the buyer, and it’s a lot of complicated steps for both of you. You need to schedule plenty of time to work on the sale of your business, and make sure you’re entrusting experts to advise you.

If you’re finding it exhausting, that’s because emotions are involved. This is a big change. You’ve toiled for years to reach this point. You’re bound to have mixed feelings.

Selling a business is time-consuming

You’ll need to adjust your schedule and clear enough time to focus on this properly. It’s more than just the negotiations. It’s the due diligence process, financial plans and processes and the transaction itself. Factor these activities on top of the need to continue business as usual. It’s common to need extra help or resources to juggle the extra work you’ll be taking on.

The workplace will be restless

Rumours travel fast. It’s not uncommon for employees to know a change is in the works long before it’s announced. They will naturally fear change. They might be concerned about continuity of employment or product direction. You want to manage your internal communications well, to avoid any damage to your reputation or employee panic.

The show must go on

Regardless of what’s in the works, it must be business as usual. There are extra eyes on your success throughout the whole process of negotiation. You can’t afford a dip in sales just as people are so interested in your financials. If you’re concerned about letting things fall through the cracks, get help.

Feeling uncertain? That’s normal

Every important step we take in life feels bittersweet. Endings and beginning are full of nostalgia and hope. It’s normal to second-guess what you’re doing. It’s okay to question whether it’s the right time, or this is the right buyer or the right place. At the end of the day, you built this business to realise value for yourself and provide employment to a team, and this is your moment. When you complete the transaction, take a moment to acknowledge the great work you’ve done getting this far.

Sell Your Software Company Without a Broker

You don’t have to use a broker to sell your business. Every business is unique, with its own needs and structures. There are some strategies that can help you sell on your own.

Get clear on what you want

People sell businesses for all sorts of motivations. You might be keen on top dollar over all else, or perhaps it’s more important to you to sell to like-minded individuals who share your vision. Perhaps you’re looking to scale your business or take it in a fresh direction and you’re open to innovative ideas. Whatever your motivation for this move, develop a clear set of guidelines to help you make decisions.

Build your network

It’s not what you know, it’s who, right? The more people you connect with in your industry, the more potential buyers you’re going to meet. Search out companies who buy companies like yours. Talk to people about their experiences. Keep an open mind to different options, and do deep research and due diligence.

Create a confidential Information Memorandum

This is a document you can use to inform buyers about your business. It talks about the solutions you offer, the market you’re in, your competitors, customers, employees and financials. You’ll include historical information and future projections, so buyers find it easy to make a decision.

Closing the deal

Selling a company involves a lot of back and forth negotiations. You’ll discuss the details of intellectual property, binding arrangements and the transaction structure, amongst other things. This is the time to enlist a legal expert with M&A experience. You can’t leave this part to chance.

Give yourself sufficient time to find the best buyer for your company and get the process right. If something seems too easy, it probably is, so always back up your work with advice from experts. Selling your company can be an emotional decision. Take some deep breaths and ensure you’re making wise choices that preserve your legacy and protect your people.