Four Tips for Start-up Businesses Seeking Private Equity

Originally posted on McCombs Today by Samantha Grasso

Austin skyline (Credit Flickr user: byeagle)

In a rich startup hub like Austin, young entrepreneurs are constantly looking for strategies to logistically shape their company to the competitive business world, and also make their product stand out to consumers. Alan Cline, principal for Vista Equity Partners, echoed this notion when he spoke on how his private equity firm selects their investments.

“The strategy is…find a business that fits our criteria, which is mission critical enterprise, software data, and technology enabled services. Find it with a very strong value proposition that is different from your competitors,” Cline said.

On Oct. 7, Cline was joined by Bill Wood, founder of the venture capital firm Silverton Partners, for the Herb Kelleher Center for Entrepreneurship speaker series. Moderated by the center’s Laura Kilcrease and co-sponsored by Bank of America Merrill Lynch, the presentation focused on Wood and Cline’s experiences in the industry. Together, they divulged advice on catching the attention of a venture capital or private equity firm.

  1. Be mindful of size, metrics, and the market  
    When considering a company for venture capital investment, Wood said the first thing he looks at is the company’s market, how their product fits in the market, and initial metrics of the company. Among those details, Wood said he questions if the market is interesting in size, growth rate, and competitive structure, if the product is innovative or proprietary, and what the company’s competitive positioning is like.”Even though [the data] is embryonic and early, we want to see the right things in terms of traffic, emergence, customer acquisition cost, long term value,…[and] monthly growth rate,” Wood said. “We’re kind of looking for indications that, ‘Hey, this is an interesting business.'”
  2. It’s all about “machine-based decision-making”According to Wood, taking advantage of available data can help entrepreneurs make stronger company decisions. If the data doesn’t exist, then develop a method to obtain it. Wood said that under this type of decision-making, marketing for startups is no longer strategized through guessing and estimations, but based on A/B testing.

    “Broadly speaking, I don’t care what you do in your life: Decision-making is dramatically changing, and if it isn’t, you’re behind. You can increasingly make better decisions based on data…If you don’t have the data, you create it,” Wood said. “We’re moving into a phase of machine-based decision-making, and it’s incredibly powerful.”

  3. Take advantage of modern business modelsBusiness models have become more important, real, and predictable. Wood said while business models used to be “people folding out assumptions,” models can now be built mathematically, and tested for reliability.

    “You can look at every assumption, you can test every assumption, and you can know pretty quickly whether you’re on track or not, and then you can start correcting,” Wood said. “They tell you, ‘Will it work?’…’Is it working?’ ‘How do I need to tweak and turn things to make it work?'”

  4. The culture of private equity funding is changingJust because a business is being sold from one equity firm to another, it doesn’t mean the business is failing. Cline said this previous notion has evolved over the last seven years, and he now knows a change of firms happens more often because the fund lifecycle has ended, or the vision of the next firm better fits the company at that point in time.

    “When we’re kind of passing the baton from one firm to another, those are the real great winning situations, because we get involved at a stage where we see opportunity…We take it as far as it makes sense for us to be involved, and then someone else says, ‘Hey, great asset, I love what you’ve done with it, now we’re going to take it global,'” Cline said.