In many ways the relationship between an Entrepreneur and a PE Investor (Investment relationship) is akin to real-life relationship between couples.
o Like a real-life relationship, an investment relationship also goes through phases of courtship (pre-investment phase), marriage / live-in (investment phase), easy or difficult separation (exit phase).
o Like a real-life relationship, an investment relationship also has its ups and downs and can vary from terrific to terrible.
However the inherent differences between the investor and the entrepreneur breed makes the investment relationship more difficult to manage. Investors and Entrepreneurs need to specifically watch out for any significant differences in the following areas as they enter into a new investment relationship :
1. Investment Horizon : Entrepreneurs are building their businesses for long-term and need stable long-term capital commitment. Most PE investors on the other hand are investing out of funds which have a limited fund life. Come closer to the expiry of the fund life, decision making by the investors get influenced by their exit priority which might not be best suited for the long term prospect of the business.
2. Risk Profile : By the nature of their background entrepreneurs are expected to be more risk taking than “investment professionals”. Investors would want the entrepreneur to keep replicating possible success stories that they have already demonstrated because their investment thesis is based on that. On the other hand entrepreneurs would like to allocate resources for seemingly risky bets which could have high payoffs.
3. Involvement : Most investors typically would invest in companies which have a strong management, solid corporate governance, streamlined system and process – essentially in companies which consume minimal bandwidth. On the contrary, barring some, entrepreneurs expect investors to bring much more to the table than just the capital. The expectation can vary from access to additional capital, top management hiring to even business development.
Happy to get your views on additional things to watch out for to ensure a successful investment relationship.