Private equity firms pool money from investors to buy companies they consider undervalued. Investors include financial institutions, pension funds, foundations, endowments and sovereign wealth funds. According to the industry trade group Private Equity Growth Capital Council, in 2009 private equity firms invested mainly in five industries: business services, consumer products, health care, industrial services and information technology. You can raise money from private equity funds by finding a fit between your business plan and a fund's investment criteria.
Prepare a professional business plan that will convince investors that you understand the business environment. It should contain detailed market analysis, an overview of the competitive dynamics of the market, including the strengths and weaknesses of the main competitors, realistic financial projections and basic human-resource planning. The business plan should also highlight risks so that an investor has the complete picture.
Know the private equity fund’s investment criteria. The most important criterion is usually the management team's background and experience. A professional business plan is not worth much unless the people behind it have a track record. Try to convince prestigious, influential and knowledgeable people (e.g., successful businessmen, academics) to join your board of directors or sign on as consultants.
Convince potential investors that you have the competence and perseverance to succeed. You must build confidence that you are up to the challenge of managing and growing a new business venture. Investors also look for sound internal business processes, including financial reporting and management control. Prepare an appendix to your business plan or a separate presentation summarizing these internal processes.
Look close to home for funds. Some of the more established private equity funds and institutional investors do not normally invest in startup companies. Talk to someone you know, such as a family member or an angel investor, who may be able to get you started. Angel investors are generally wealthy individuals who independently invest in attractive business opportunities. Your local chamber of commerce may have a list of angel investors in your area.
Be flexible in negotiating the final deal. The investor may insist on certain rights and restrictions in order to mitigate risk. However, make sure that these covenants do not hamper your ability to run the business independently.
Due diligence is part of proper investment risk management. Therefore, be open to suggestions. You should also do your own due diligence on potential investors because you could be working with them for a long time. Question the long-term commitment of investors who make promises before asking tough questions.
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