Private Equity Fundraising Basics

Running a rapidly growing business takes more than time and expertise – it takes money. Traditional debt options are rarely an option for startups, and most founders are looking for a business relationship as well as an influx of funds.

Private equity (PE) is ideal for many founders and CEOs. Not only can companies leverage funds needed to accelerate growth, but they can also take advantage of private equity investors’ networks, knowledge, and resources.

However, getting funds from private equity firms isn't as straightforward as other fundraising options.

What is private equity fundraising?

A private equity firm or investor is essentially a form of private financing. A private equity company is made up of funds and investors that invest in private companies, and at times, buy public businesses. A PE firm is usually composed of General Partners (GPs) and Limited Partners (LPs). GPs are fully liable and manage the fund, while LPs are third party investors who hold limited liability.

One of the features that make private equity so attractive to entrepreneurs is that they are incredibly flexible. Founders are not reliant on a bank or lender for capital, and there is less stress on quarterly performance in comparison to their public counterparts.

What are the types of private equity?

Private equity investments can take a few different forms, depending on the company's situation. The main types of private equity investments are:

• Leveraged Buyouts (LBO) – In this case, one company buys another. This is usually done to resell the company for a profit or start an IPO. In the leveraged buyout model, a private equity fund may use debt and equity financing to complete the transaction.
• Real Estate Private Equity – This form of PE fund is used to invest in commercial real estate and real estate investment trusts (REIT).
• Venture Capital – This form of private equity funds is the type most entrepreneurs are familiar with. Venture capital firms typically invest in a startup to promote rapid growth. In addition, venture capital can be broken down further. There are some investors who only focus on seed funding, for example, and others that invest only in late-stage companies.

When it comes to private equity fundraising, most founders are referring to venture capital, which is geared toward nurturing a company and expanding its capabilities.

What is the private equity fundraising process like?

The private equity fundraising process is rigorous. In fact, only about 0.05% of startups get access to venture capital. The process is different for every business, but generally speaking, founders need to:

• Identify suitable private equity funds
• Find an introduction to the fund and its investors
• Provide a clear strategy and demonstrate competitive advantages
• Propose a realistic budget necessary for success
• Touch on proposed marketing initiatives and benchmarks

In other words, a founder must locate and form a relationship with their ideal investors. Then, it's critical to offer a concise, clear, and well-researched presentation. Investors will want to understand not only the business but what they stand to gain from choosing to invest in it.

How to improve your chances of getting funding?

Fundraising through a PE fund is difficult but not impossible. To improve the chances of success, founders should:

• Approach an investor who understands their industry and market
• Be realistic about the risks and the rewards
• Provide detailed financial and research information
• Highlight the expertise of the management team

Ideally, founders and CEOs should tell a story with their pitch, and go beyond the slide deck to provide essential information. Customer demographics, current user feedback, sales numbers, and clear financial records go a long way to show that a business understands its direction and growth potential.

Furthermore, it's critical not to hype up potential gains. Investors are cautious with their funds and look for deals that provide high value at low risk. Most can understand when a potential investment looks too good to be true.

Is venture capital right for your business?

Private equity is often seen as the holy grail of business funding, but it isn't the only type of financing. Before submitting a proposal or meeting with investors, those looking for investment must be clear about the required funds and how private equity will help achieve specific business objectives.

At the same time, landing a venture capital deal can be a life-changing experience and truly accelerate a startup. In deciding to initiate the fundraising process, the most important thing a founder can do is keep clear records and research documentation. Keeping track of a company's progress early on will make it easier to put together a proposal when the need for capital arises.