While some founders have great experiences taking on private equity funds, others struggle once a private equity firm comes in.
Serial entrepreneur Stephen Marshall says after bootstrapping a company he and a partner founded and grew to $20 million in annual recurring revenue, there came a time when he and his partner discussed getting some liquidity to manage risk and fuel growth.
"My experience with private equity has been good," Marshall says. "Certainly, there has been challenges. When you're dealing with a founder-led company that has hired and brought in literally everybody in the company — when you're small and when grow to 800 people, you tend to know the people in your company and you have a history with them. That was the case with me. So, more of the challenge is around the cultural change."
Marshall says something he thinks all founders go through when they sell part or all of their business to private equity is they have to look at their role differently.
"For me, I had to separate out being an owner and founder to being an investor sitting on the board once you take on private equity, and a separate role as an executive operating the company — whether it's CEO, CIO, whatever it is. That's the hardest transition that a lot of entrepreneurs that I’ve seen since I had to go through it."
Helping him make that shift has been advice from mentors that helped him understand that he had to change his mindset after taking on institutional money. That, he says, will determine how happy or unhappy a person is with result.
"Of course, there are good private equities and challenges with certain private equities, but it's the mindset you're going into and having that adviser or two or three or four that tell you what to expect so that you can reset your expectations both personally and professionally."
The founders he's seen do well when PE enters the equation are those who understand what their personal objectives are and then balance that with the expectations that come with taking on institutional money.
With one of his previous companies, INVISION, after taking on private equity and heading towards an exit, there were expectations about the strength of the company's executive team — the people spending the dollars and driving the strategy forward. Private equity, he says, can be a council for this rather than the driver of it. It comes down to the founder’s perspective — that there's a set of experts within that private equity partner to help source and qualify good executives when such a team is not in place.
"You certainly have to reassess your original expectations around what your executive team needs to be able to do. Whether you take on private equity money or not, as you grow, there are different capabilities you need on an executive team. There are those that can grow into that role, learn and change, and there are others that have a hard time dealing with the change part of this."
Similar with founders, as the company grows, they need to be willing to reassess their own capabilities, he says, and not have their ego interfere with their ability to adapt.
"When you grow and you're successful as an entrepreneur, it's easy for the team that got you there to think, Well, we know it all, we know how to get there. But once you take on institutional money, transparency, being collaborative with the private equity, sharing the vision and sharing the responsibilities for molding some of the vision, are pieces that not everyone can grow into."
Marshall spoke at the 2020 Chicago Smart Business Dealmakers Conference about how founders and CEOs need to prepare their company, and themselves, for major events in a business's lifecycle. Hit plat to catch an excerpt from that discussion.