February 6, 2025 • 33 mins
In this informative episode of the Private Equity Experience podcast, hosts Emily Sander, Rory Liebhart, and Ed Barton break down the complex world of private equity, venture capital, and series funding. Learn the differences between VC and PE firms and how to navigate the ecosystem to secure funding for your startup. Discover the importance of assembling a strong team of advisors and resources, including investment banks, financial advisors, and startup accelerators like Y Combinator and Startup Grind. Get insights on preparing for private equity investment and learn about essential books like "On Ramp to Exit" that can help you on your journey. Tune in to this episode to gain a deeper understanding of the private equity landscape and take the first step towards securing funding for your business.
Timestamps:
00:00 Introduction and Acronyms Galore
00:52 Understanding Private Equity and Venture Capital
01:33 Differences in Investment Strategies
02:47 Success Rates and Baseball Analogies
05:23 Fund Structures and LP Investors
07:40 Venture Capital vs Private Equity: Key Differences
09:50 Series A, B, and C Explained
11:13 The Transition from VC to PE
13:54 Bootstrapping vs Seeking VC Funding
15:57 Optimism in Startups vs Financial Plays in PE
16:27 Different Perspectives in Early-Stage Companies
17:00 Final Thoughts on Investment Strategies
18:00 The Importance of Consistency in Performance
18:21 Understanding Private Equity Hit Rates
18:36 The Concept of Zombie Companies
19:20 Private Equity vs. Venture Capital Strategies
23:53 Navigating Board Seats and Ownership
30:47 Advice for Founders Seeking Investment
==============================
🎙 Podcast – Strategies, PE 101 & witty banter
📚 Book – On‑Ramp to Exit, full deal life cycle
🛠Resources – Free templates, guides, tools
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================================
Who Are We?
Three insiders. One mic. All things private equity — explained. Hi 👋 We’re Ed, Rory, and Emily — a CEO, a CFO, and a Chief of Staff — here to demystify the world of private equity. Between us, we’ve sat in the founder’s chair, run PE‑backed companies, and worked on the deal side, so we know the wins, the pitfalls, and the jargon (and we’ll explain it).
Through the Private Equity Experience Podcast, our book On‑Ramp to Exit, and a library of free tools and templates, we share real‑world stories, practical strategies, and insider insights to help you navigate every stage of the PE journey — whether you’re leading a portfolio company, joining a deal team, considering PE, or just PE‑curious.
🔗Connect with Ed
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
emily-sander_1_12-17-2024_1 (00:34):
Are we ready to rock and roll?
This is like full of acronyms.
It's like,
squadcaster-jidf_1_12-17- (00:37):
let's
emily-sander_1_12-17-2024_ (00:38):
it's like the one, two, threes of VC
and series ABC into PE firms.
So here we go.
squadcaster-jidf_1_12-17- (00:46):
Yeah,
emily-sander_1_12-17-2024 (00:46):
Strap in boys and girls.
ed-barton_1_12-17-2024_16 (00:48):
baby.
squadcaster-jidf_1_12-17- (00:48):
Yeah,
emily-sander_1_12-17-2024_1 (00:51):
But I think it's a good thing to
talk about.
Cause like, When I go, Hey, youknow, private equity experience,
we're talking about the PE worldand they're like, Oh, so like,
like VC.
And I'm like, kind of, sort of,it's mostly like VC comes
beforehand generally, but how dowe want to get people into this?
ed-barton_1_12-17-2024_16 (01:09):
maybe never comes at all.
squadcaster-jidf_1_12-17 (01:10):
right.
emily-sander_1_12-17-202 (01:11):
That's true too.
ed-barton_1_12-17-2024_16 (01:13):
shows up on the scene.
Or PE never shows up on thescene.
It's like, it's a, it's a wholeecosystem where some, some feed
on the slower, weaker animals.
some
emily-sander_1_12-17-2024_1 (01:26):
Are you the limpy gazelle or are you
the?
ed-barton_1_12-17-2024_1605 (01:28):
the fast
emily-sander_1_12-17-2024_16 (01:30):
Oh my god.
squadcaster-jidf_1_12-17-202 (01:31):
Mm hmm.
emily-sander_1_12-17-2024 (01:32):
Okay.
squadcaster-jidf_1_12-17-2024 (01:33):
I
emily-sander_1_12-17-2024 (01:33):
Okay.
squadcaster-jidf_1_12-17-2 (01:33):
some similarities, i.
e.
that people that invest in thesecompanies generally have an idea
that they want to make a returnon that investment, but you
know, that's some ways where thesimilarities might end.
I mean, there, there, there aretwo different beasts to take
that analogy a step forward.
Uh, You know, um, and a lot ofit has to do with where the
company's at in its life cycle.
Um, a lot of it has to do with,you know, um, some
(01:56):
characteristics of the business,whether it money, doesn't make
money, you know, um, all thesefactors that go into
emily-sander_1_12-17-2024 (02:04):
Okay.
squadcaster-jidf_1_12-17-20 (02:05):
PE.
emily-sander_1_12-17-2024_16 (02:06):
So for like those who are like,
what the heck, what the hell areyou talking about?
BC is venture capital and it'sanother source of wealth.
Capital.
It's another source ofinvestment and it works in a lot
of ways, similar to P E.
So like broad strokes, samegeneral structure and makeup.
It typically comes earlier inthe process.
(02:30):
So like startups, um, might getangel investors and then they
might get VC funding and thenmaybe they stay there forever.
And maybe a subset of that goeson to then have P E.
Investors.
squadcaster-jidf_1_12-17- (02:45):
Yeah.
I
emily-sander_1_12-17-2024_1 (02:46):
are broad, broad strokes.
squadcaster-jidf_1_12-17-2 (02:47):
look at it is, you know, I've read,
there's a lot of statistics outthere, but the ones that stick
out in my mind are, know, only10 to 20 percent of all venture
backed companies.
successfully exit to anacquisition or an IPO.
So you kind of think about thatacquisition piece being where PE
oftentimes will come in.
(03:08):
Um,
emily-sander_1_12-17-2024_1 (03:08):
And then
squadcaster-jidf_1_12-17- (03:09):
takes a while to get there at times,
you know, um, for businesses andthey may never get there like Ed
said.
ed-barton_1_12-17-2024_16 (03:16):
Yeah, the, the
emily-sander_1_12-17-2024_ (03:16):
the,
ed-barton_1_12-17-2024_16052 (03:17):
PE side.
You're looking at businesseswhere they expect to have about
a 80 percent to 90 percentsuccess rate.
And, or, you know, if you wantto use a baseball analogy, I'll
use a Mariners baseball analogy.
emily-sander_1_12-17-2024_16 (03:32):
oh boy,
ed-barton_1_12-17-2024_16052 (03:33):
PE is like each row, they get up,
they get a lot of hits,
squadcaster-jidf_1_12-17- (03:36):
Yeah.
Yeah.
They can.
Yeah.
ed-barton_1_12-17-2024_ (03:40):
they're moving around the bases.
They're gonna steal a base hereor there, but they're really
hitting for average.
if you've got someone like,we'll call it an Adrian belt
tray,'cause I'm gonna give my,give my age where their batting
average, while they were inSeattle, everywhere else was
fine while they were in Seattle.
Might be down around two 30,they can hit the long ball.
(04:01):
And so they're up there kind ofswinging away and in the four
hole trying to trying to knockout the long ball.
So the difference is venturefirm, they're, they're looking
for home runs, they're lookingfor 10 X, 12 X returns.
And they recognize, like Rorysaid, that 80 percent may end up
at zero, or they'll be lucky toget their capital back.
(04:22):
If that was in P.
E.
land, that would becatastrophically poor.
Batting average, they want an 80to 90% batting average, but
they're looking for, you know,20, 25% returns, not, know,
1000% returns on 10% of theportfolio.
emily-sander_1_12-17-2024_1 (04:38):
but they have more swings at bat.
Right.
ed-barton_1_12-17-2024_160 (04:41):
Hard to say.
I, I, I would, I would sayyou've got a much larger pool of
potential venture, potentialventure.
Um.
just because almost any startup,especially in the tech side,
tend to be a venture potentialventure investor.
Whereas as Rory noted on the P.
E.
side, they're looking for farmore mature organizations where
(05:04):
they're probably making money,you know, and so it's a it's a
smaller universe, a little
emily-sander_1_12-17-2024_1 (05:09):
But don't they have, well, okay.
I was going to say, don't theyhave more companies in one fund
or is that not the case
squadcaster-jidf_1_12-17-2024 (05:20):
I mean, let's, let's kind of take
it up another level.
So We talked about thefoundation of private equity
funds being the LP investors,right?
venture funds also have LPinvestors.
And oftentimes those LPinvestors have a private equity
(05:40):
strategy and a venture strategy.
They don't look at them as thesame class of investment, higher
risk, higher return, like Edsaid.
So allocating capital from LPsYou know, spans both PE and
venture.
So, you know, whether the sizeof the fund or the number of
portfolio companies in the fundthat may vary or may be similar
(06:02):
across, you know, differentparts of the market, larger
institutional, however you wantto put that, um, it's just a
different class of investmentaltogether.
You know, you, it's a privateinvestment, which is why you
kind of put those two in thesame bucket.
But, you know, as far as therisk return profile, what it
comes down to is they are quitedifferent.
(06:24):
Um, and you know, some would sayventure being more speculative.
emily-sander_1_12-17-2024_ (06:28):
when the Orissa laws passed in the
eighties that allowed 10 percentinto high risk, high risk
vehicles, did that, does thatinclude both VC and PE or just
one or the
squadcaster-jidf_1_12-17-2 (06:40):
Ooh, that's a good question.
I bet Ed's got an answer tothat.
I don't.
ed-barton_1_12-17-2024_16052 (06:44):
In general, in general, yes.
Um, because the risk is drivenas much by liquidity risk as it
is by
squadcaster-jidf_1_12-17- (06:51):
Yeah.
ed-barton_1_12-17-20 (06:51):
perception of, this perception of, oh, my
gosh, these are small companies.
It's really how liquid howquickly can you turn that
security into cash?
And so that that's the, that's ahot.
A higher risk.
And so as a result, that's, theygenerally will fit in that same
bucket.
emily-sander_1_12-17-2024 (07:10):
Okay.
squadcaster-jidf_1_12-17-20 (07:11):
you know, from a founder's
perspective too, right?
Like more likely that a founderwill take on venture.
Investment, but give up less ofthe company to do so.
In other words, depending onthat series or where that, you
know, VC investment comes in,founders still controls most, a
lot of the company by design,uh, when you get towards PE, as
(07:34):
we've talked about, you know,PE's mostly taking a control
position.
At that
emily-sander_1_12-17-2024 (07:40):
Okay.
What's, so what are like, whatare the main things that are
similar between VC and PE andwhat's the, what are the main
differences?
ed-barton_1_12-17-2024_16052 (07:49):
So I'll hit, I'll hit the biggest
similarity, which is they'reboth a source of growth capital,
emily-sander_1_12-17-2024 (07:54):
Okay.
ed-barton_1_12-17-2024 (07:55):
they're, they're both ways that you can
infuse cash into the business.
One of the biggest differencesthat is related to that is
generally on a private equityside, the ownership The, the
ownership selling ownership istaking cash out of the business
and putting it in their pocket.
Generally in venture, there's nocash going out of the business
(08:17):
in bleeding
squadcaster-jidf_1_12-17- (08:18):
Yeah.
ed-barton_1_12-17-2024 (08:18):
infusing additional cash to keep it alive
and allow it to grow to the nextstage.
So the.
They're both sources of capital,but the biggest difference is
how that capital is generallygoing to be used on the, on the
backside of the transaction.
squadcaster-jidf_1_12-17-2024 (08:36):
I was just gonna add it from
slightly different angle is, youknow, comes back to the
investment thesis for, you know,both of those categories.
So look, venture investmentoften times is just a pure bet
on an idea or a founder that'sbeen successful in the past.
I've heard of and, and sort ofbeen close to business that are
(08:58):
not only pre revenue, but likepre product.
you basically are dealing with aserial entrepreneur that people
put trust in and they're willingto roll the dice that, hey, this
person has done three businessesand exited successfully.
Why can't they do a fourth?
And I'm willing to put some,some money behind that.
PE is a much more.
Much different approach, I wouldsay not to say that they don't
bet on management teams, butit's more management team and
(09:21):
also a viable business and, youknow, not only viable business,
but, you know, profitable at thetime they invest, you know, so I
guess a simple way to thinkabout it is maybe, know, And
we've talked about it, you know,to be attractive to PE group,
you've got to be generallycashflow positive and have a
certain amount of revenue tostart, uh, before, you know, it
(09:42):
makes sense for PE group to comein.
emily-sander_1_12-17-2024_1 (09:45):
You have to be a little bit more
proven.
squadcaster-jidf_1_12-17- (09:46):
Yeah.
That's a good way to put it.
Exactly.
Right.
Yeah.
emily-sander_1_12-17-2024 (09:49):
Okay.
I think another thing peoplehere tossed out are like Series
A and Series B and Series C.
And in my experience, the waythose are used really depends on
the VC fund and like the exactsituation.
There's no like standardization.
ed-barton_1_12-17-2024_160 (10:04):
It's a,
emily-sander_1_12-17-2024 (10:04):
Yeah.
ed-barton_1_12-17-2024_16 (10:04):
order in which,
emily-sander_1_12-17-2024_ (10:06):
Yes.
Sure.
ed-barton_1_12-17-2024_16052 (10:08):
A, B,
squadcaster-jidf_1_12-17-2024 (10:08):
I had an argument about this today
with a client of mine.
It was like, you know, there's aperspective that it has to do
with much money's been raised todate.
There's a perspective that hasto do where the company's at as
a business in its own lifecycle, you know, so yeah, it's
it's uh, yeah, it just really isjust a sequential, uh, sequen
emily-sander_1_12-17-2024 (10:25):
Yeah,
squadcaster-jidf_1_12-17 (10:26):
rounds that are priced, basically.
ed-barton_1_12-17-2024 (10:28):
normally your a round is going to be your
first institutional round.
And
squadcaster-jidf_1_12- (10:32):
Correct.
ed-barton_1_12-17-2024_16052 (10:33):
be seed
squadcaster-jidf_1_12-17- (10:34):
Yeah,
ed-barton_1_12-17-2024_16052 (10:34):
to essentially seed the business,
to get it to, to, to plant theseeds.
And then it starts to grow.
emily-sander_1_12-17-2024 (10:40):
okay.
ed-barton_1_12-17-2024_1605 (10:40):
got A through, A through Z rounds
after that.
emily-sander_1_12-17-2024_ (10:45):
I've seen some cases where like it's
just at the discretion of thefund.
There's no like you hit this.
Sometimes I've seen there youhit this milestone, and then
that opens up the potential forfurther funding.
But I've mostly seen it atdiscretion.
Is that what you guys have seenor other models?
squadcaster-jidf_1_12-17- (11:02):
yeah, it's as you say, it's, it's kind
of a discretionary thing,
emily-sander_1_12-17-2024 (11:07):
Okay.
squadcaster-jidf_1_12-1 (11:07):
targets and milestones for different
businesses and different funds.
There's no universal.
emily-sander_1_12-17-2024 (11:12):
Okay.
So let's move into P.
E.
So let's do kind of like a recapreally quickly.
So founder starts a company,like it's just a, it's just an
idea and a dream.
And then they get family andfriends money and they start a
little office in their garageand then they get pre seed money
or does angel investor can comein there too.
ed-barton_1_12-17-2024_16 (11:34):
Seed,
emily-sander_1_12-17-20 (11:34):
angels, pre seed,
ed-barton_1_12-17-2024_ (11:36):
Friends and Family, that's all kind of
the pre institutional money.
emily-sander_1_12-17-2024_1 (11:39):
pre institutional money.
squadcaster-jidf_1_12 (11:40):
handshake type of deal, you know, like the
back of the envelope, you know,let's, let's pass the hat around
and get some money in.
Yeah.
emily-sander_1_12-17-2024 (11:47):
Yeah.
But if you've got like VC, likeif you're in your series B, like
you've got like an office,you've got people, you've got
recruiting and hiring and, andteams going on.
And then there comes a pointwhere I guess about 20 percent
will say, okay, we want to takea look at taking on Additional
investment from a private equityfund.
What does that transition looklike?
(12:09):
What does that decision looklike?
How, when, why would you dothat?
Ed go.
ed-barton_1_12-1 (12:15):
Interestingly, you're, a lot of times you're
not going to see those twostreams cross early.
generally what you're going tosee is a company may be
initially VC funded.
And get to a certain pointpublic, then begin to kind of
stagnate as a public company.
(12:36):
And at that point they may getpicked up by private equity and
taken private.
squadcaster-jidf_1_12-17 (12:39):
right.
ed-barton_1_12-17-2024_1605 (12:40):
Um, but you tend not to see, a VC
backed company.
know, again, they will, you willhave VC back companies as zombie
themselves where
squadcaster-jidf_1_12-17 (12:49):
That's right.
No
ed-barton_1_12-17-2024_160524 (12:50):
a certain point, they're spending
enough cash flow where theywon't die, but they're, they're
not spending enough cash flowwhere the private equity guys
are looking at this as a, youknow, really good investment
for, for that fund.
They may at that point, flip itout to, um, flip it out to a
private equity fund that islooking to either in kind of
bring that.
That technology or that companyinto their portfolio generally
(13:14):
is a
squadcaster-jidf_1_12-17- (13:14):
quasi strategic buyer style.
Yeah.
ed-barton_1_12-17-2024_16052 (13:17):
of their portfolio companies, but
the two tend to, once you startoff again, once you kind of
start off in a venture world,you're generally going to fly or
die.
It's, it's either taken off oryou're going to blow up.
if you in the private equityworld, you've generally
bootstrapped yourself to thepoint where, you know, the
company's, the company's gottento a point where private equity
(13:39):
sale becomes a method ofliquidity, gaining liquidity for
the ownership.
Um, as opposed, and you'regrowing at a nice steady 25, you
know, 30 percent
squadcaster-jidf_1_12-17- (13:49):
Yeah.
30 and
ed-barton_1_12-17-2024_160 (13:50):
rate as opposed to 300 percent
squadcaster-jidf_1_12-17-20 (13:52):
30.
Yeah.
ed-barton_1_12-17-2024_160 (13:53):
Yep.
emily-sander_1_12-17-2024_16 (13:54):
So is it more likely that like as a
founder, you would build acompany for go VC funding?
Cause you're doing fine byyourself.
You have a, you have a provenproduct and company up and
running and then you go directto PE.
ed-barton_1_12-17-2024_16 (14:07):
Yeah.
You would not see, I mean,interestingly, the way you frame
that up provides a really.
Interesting insight into whogoes for what.
If you have the capital tobootstrap your startup to the
point where you can get the PEVC, wouldn't even look at it.
VC looks at companies where it'slike, if this thing takes off,
(14:28):
we need to just pour capital onthis thing until, you know,
we're watching the flames as itburns, you know, but we know
that at some point this is goingto turn into a rocket ship, you
know, that's
emily-sander_1_12-17-20 (14:38):
They're going for the moonshot, like
moonshot.
ed-barton_1_12-17-2024_1605 (14:41):
and so normally a typical founder
doesn't have the capital to dothe moonshot.
And so that's where the VC comesin.
If they have the capital,they're probably at a good,
steady, solid growth rate, youknow, that 30 percent growth
rate, 40 percent growth rate,they're self funding.
And that's a classic PE typestructure.
That's a classic PE type target.
squadcaster-jidf_1_12-17- (15:00):
Yeah.
emily-sander_1_12-17-2024 (15:02):
Okay.
squadcaster-jidf_1_12-17- (15:02):
Cause
emily-sander_1_12-17-2024_ (15:03):
And,
squadcaster-jidf_1_12- (15:03):
remember what we talked about, you know,
with, uh, With private equity,so much of the deal deals that
they do are dependent on addingleverage to a business where,
you know, if you don't have cashflow to support a, you know, um,
you know, newly, issued debt,then, you know, it's not going
to work.
And that's like, largely thecase for a lot of startups that
(15:23):
are literally have no cash, youknow, so, or they're burning
through cash at a clip that'snot going to support a bank
loan, you know, so,
emily-sander_1_12-17-2024_1 (15:32):
and the way the math works for like
the VC fund is, let's say youhave 10 companies
squadcaster-jidf_1_12-17- (15:36):
yeah.
emily-sander_1_12-17-2024_1 (15:36):
you just know statistically nine of
them are going to just crash andburn and be nothing, but the
10th will do a moonshot that andthe, the gains on that one will
cover all the other losses thatyou've taken out of the 10.
That's kind of the game they'replaying.
ed-barton_1_12-17-2024_1605 (15:50):
the losses.
Plus give you a 30
emily-sander_1_12-17-2024_ (15:52):
Yes.
squadcaster-jidf_1_12-17- (15:52):
Yeah,
emily-sander_1_12-17-2024_ (15:53):
Yes.
squadcaster-jidf_1_12-17- (15:53):
yeah,
ed-barton_1_12-17-2024_1 (15:54):
thing.
emily-sander_1_12-17-2024_ (15:55):
Yes.
Okay.
squadcaster-jidf_1_12-17-2 (15:57):
just a, I just, you know, there's no
other way to say it.
There's just a, a differentfeeling about, you know,
optimism in, in startups andventure backed companies.
Then a P a P is much moreapproached as kind of like a.
a financial play rather than a,you know, like a growth story,
(16:17):
you know, um, uh, it, thatsounds very qualitative and it
is, but that, I think that's a,that's a reality.
People tend to be either venturepeople or P people.
I've begun working with some,some, some early, really early
stage companies and it iscompletely different.
Then my experience having workedin PE for 20 years, it's, it's
(16:38):
definitely a different,perspective.
Um, not, not one is not wrong orone is not, uh,
emily-sander_1_12-17-202 (16:44):
Right.
Appreciate it.
squadcaster-jidf_1_12-17-20 (16:45):
uh, better.
It's just different.
You know,
ed-barton_1_12-17-2024 (16:47):
Finance, finance guy does not like.
The burning cash
squadcaster-jidf_1_12-1 (16:51):
there's a little, yeah, I mean, yeah.
If nothing else, burning cash isthe, you know, it just, it just,
no matter what, it never makessense to me, but you know,
ed-barton_1_12-17-2024_160 (17:00):
back to the analogy I used it the
earlier on the baseball side,you know, on a VC, you're,
you're generally going to have,you know, they're, they're not
gonna have a 1 in 10.
They're likely to have about a400, you know, a 40 percent but
of that 40%, if it's 10.
the four of that actually don'tflame out, you're going to have
two zombies in there that arebasically going to be, they're
(17:21):
going to be surviving, butthey're not going to give them a
real return.
They may have a negative return,but they won't die.
got one.
That's going to be a nice, youknow, 30, 40%.
50 percent annualized return.
And then you're going to, theirgoal is to have one out of 10 or
one out of 20 be a thousandpercent return, you know, 10 X,
(17:41):
20 X, and that's really the, andthen you're going to have four
or five of them that are notgoing to.
you know, they're going to go tozero.
emily-sander_1_12-17-2024 (17:50):
Yeah.
So wait.
So in your analogy was Ichiro aPE firm
ed-barton_1_12-17-2024_1605 (17:55):
No, each row.
Yeah.
Each row is more of a PE firm.
He's really like, he's sittingfor singles and doubles.
It's on base.
It's moving around the bases.
It's
emily-sander_1_12-17-2024_1 (18:02):
and it's more predictable and
consistent and like, so if youhave like a good stretching
routine and habits that you doto like get yourself, your swing
might look changed to anAmerican audience, but like, Oh,
it works.
So keep doing it.
Amazing.
That's Ichiro.
Okay.
So that's PE firm.
ed-barton_1_12-17-2024_1605 (18:21):
The other side to the, to the
equation on the, on the privateequity side is, you know, if,
like I said, if they end up witha 40 percent hit rate, they're
failing,
squadcaster-jidf_1_12-17-20 (18:32):
Big time.
ed-barton_1_12-17-2024_16 (18:33):
hard.
squadcaster-jidf_1_12-17- (18:33):
Yeah.
ed-barton_1_12-17-2024_16 (18:34):
mean, they, they should be in the
eighties to nineties.
Um, but the, the concept whereyou've got this strange area
where the two will play witheach other, like I said, is, is
like the zombies in the, andthat's a, that's a technical
term
squadcaster-jidf_1_12-17- (18:48):
Yeah.
ed-barton_1_12-17-2024_1605 (18:49):
DC, the zombies, where, uh, They
just won't die, they're not goodenough to, they're not, they're
not alive and they're not dead.
They're just kind of there doingtheir thing, but they just, and
I've got one of the, one of thecompanies I'm working with now
is a zombie.
It's essentially a company wherethey're down to like their last
four or five employees.
They've got, you know, they're,they're got enough revenue to
(19:10):
pay the bills.
They can't grow and they, andwe're not shutting them down.
And so they're just kind ofcranking along
emily-sander_1_12-17-2024_1 (19:17):
So.
Thank you.
Okay.
ed-barton_1_12-17-2024_16 (19:19):
Break even.
emily-sander_1_12-17-2024_16 (19:20):
So let's take the analogy of, of 10
companies and I just picked 10cause it's easy math.
So where the VC wants one ofthem or a small percentage to go
like a thousand percent for a PEfirm, the equation is almost
flipped where it's like they'lltake one or two clunkers, but
the rest have to hit at like twoto five X.
Is that generally
ed-barton_1_12-17-2024_16 (19:40):
Yeah.
emily-sander_1_12-1 (19:40):
acceptable?
So,
ed-barton_1_12-17-2024_1605 (19:41):
two to five is, is pretty legit over
a five year hold.
And, and the, even the clunkers
squadcaster-jidf_1_12-17- (19:49):
Yeah.
ed-barton_1_12-17-2024_16052 (19:49):
my experience.
Um, and Rory and I have workedwith some of the same private
equity firms.
Even the clunkers areunderwritten so that if they
have to
squadcaster-jidf_1_12-17- (19:56):
Yeah.
ed-barton_1_12-17-2024_160 (19:57):
zero
squadcaster-jidf_1_12-17 (19:58):
That's what I
emily-sander_1_12-17-2024 (19:58):
Yeah.
squadcaster-jidf_1_12-17-2024 (19:59):
I mean,
ed-barton_1_12-17-2024_16 (19:59):
still gonna be able to sell out of
those and get.
emily-sander_1_12-17-2024_ (20:01):
They make it so they can't lose it.
And
squadcaster-jidf_1_12 (20:03):
directors at a VC firm literally say, you
know, I'm looking for that oneor two out of 10 to really hit,
know, zero directors at a PE tosay, I'm going to be accepting
one to two losses on myportfolio.
They're not, they're going to belike, I want about a thousand.
I may make, you know, One and ahalf to two X on a couple of
these, but I'm making moneybecause I'm at a financial,
(20:26):
financially engineer my way outof a return or into a return, no
matter what.
ed-barton_1_12-17-2024_1605 (20:30):
The one private equity firm that the
three of us all worked with whenI would go to their annual
meetings and, and get a chanceto take a look at what the
performance of those portfoliocompanies were out of like 70
four funds, may have had twothat went to zero.
Yeah,
emily-sander_1_12-17- (20:50):
sometimes they'll flip them into dividend
plays, which we can talk about.
Like the timeline stretches wayout and they just take dividends
month over month and the wholethesis and how you operate that
company changes, but they canflip them into that.
squadcaster-jidf_1_12-17- (21:03):
Yeah.
emily-sander_1_12-17-2024_160 (21:03):
I remember
squadcaster-jidf_1_12-17-2 (21:03):
mode in that case.
emily-sander_1_12-17-202 (21:05):
turtle mode.
I love that.
Okay.
Turtle mode.
Oh my gosh.
Um, but I remember us threetalking about like, Hey, we were
at this place with the PE firmand we were like, Out of like, I
think it was 12, 12 companies inour fund.
I can't remember, but we didn'twant to be like the very last
(21:25):
certainly, but we didn't want tobe like the very first there's
like a sweet spot where if youwere like second or third best,
like they just, they just keepgiving you what you need, like
anything you need, like, let usknow, but like they let us run
the company and that was likethe sweet spot.
squadcaster-jidf_1_12-17-2 (21:39):
keep getting whatever you need.
ed-barton_1_12-17-2024_ (21:41):
that's,
squadcaster-jidf_1_12-17-2 (21:42):
been a middle or back of the packer
or something like that.
Cause it's always been a grind.
ed-barton_1_12-17-2024_16 (21:46):
might be a bit of a stretch.
But yeah, the one
squadcaster-jidf_1_12-17- (21:47):
Yeah,
ed-barton_1_12-17-2024_1605 (21:48):
one of three of us worked at was a
solid, it was a solid performer.
It was mid pack
squadcaster-jidf_1_12-17 (21:51):
really good.
ed-barton_1_12-17-2024_1605 (21:53):
Um, and we were largely left alone.
There was always pressure.
How are you going to grow?
Are you
emily-sander_1_12-17-2024 (21:57):
Sure.
ed-barton_1_12-17-2024_1605 (21:58):
How are we going to, you know, they
would re lever the thing.
And Be like, stop, you know, I'mgetting panicked because you're
going to screw up
squadcaster-jidf_1_12-17-2024 (22:04):
I need some breathing room.
ed-barton_1_12-17-2024_16 (22:06):
We're just getting comfortable and now
you're going to throw additionalleverage on dividend dividend
crap out um, and that would beyou know, that's a that's But
you're fairly much left alonenow the last the last P back
back company I ran, we were therun of the litter you know, and
were not left alone.
And it was, you know, callsmultiple times a week on where's
(22:29):
the revenue and how are yougoing to cut more expenses?
squadcaster-jidf_1_12-17- (22:32):
Yeah,
ed-barton_1_12-17-2024_1605 (22:32):
you know,
emily-sander_1_12-17-2024 (22:32):
Like, you don't want to be at the
ends, like the extremes.
Cause,
ed-barton_1_12-17-2024_160524 (22:35):
I don't mind being at the top.
emily-sander_1_12-17-2024_1 (22:37):
but that, I mean, doesn't that come
with its own pressure though?
ed-barton_1_12-17-2024_16 (22:40):
does, but that pressure is good
pressure.
Cause you're going to get paid.
You know, you know, it's, you'regoing to make it rain.
emily-sander_1_12-17-2024 (22:47):
Okay,
squadcaster-jidf_1_12-17-202 (22:47):
is when it's an absolute grind.
And you're like, I do not seethe carrot at the end of this
stick.
emily-sander_1_12-17-2024 (22:53):
fair.
squadcaster-jidf_1_12-17-202 (22:54):
or the light at the end of this
tunnel, whatever analogy or potof gold at the end of this
emily-sander_1_12-17-2024_1 (22:58):
But some of them, some of them get
like real excited by the leaderand it's like, okay, I want, I
was good with like a three X andnow I want like a six to seven.
And they go crazy with it.
Cause they think they can likebeat me.
Make it more and it's like, juststick with the stick with the
program, double down on stuffand let's get a really good
return on this.
squadcaster-jidf_1_12-17- (23:15):
Yeah.
emily-sander_1_12-17-2024_160 (23:16):
X is a good return for everyone
that makes everyone happy at theend of the day.
OK,
ed-barton_1_12-17-2024_16052 (23:21):
in the
emily-sander_1_12-17-2024_16 (23:22):
so
ed-barton_1_12-17-2024_1 (23:22):
world, that's not how it works.
It
squadcaster-jidf_1_12-17-20 (23:24):
No.
ed-barton_1_12-17-2024_1 (23:25):
you're driving all the time
squadcaster-jidf_1_12-17-2 (23:30):
Yes.
ed-barton_1_12-17-2024_16052 (23:31):
up or grow up.
And you've got, you've reallygot no, and it is like,
squadcaster-jidf_1_12-17-2 (23:36):
It's good.
ed-barton_1_12-17-2024_160 (23:37):
like a marathon at a sprinter's pace.
squadcaster-jidf_1_12-17-2 (23:38):
Yep.
emily-sander_1_12-17-2024 (23:40):
there is no turtling up.
You will blow up or grow up.
squadcaster-jidf_1_12-17-2 (23:43):
man.
You are not the, you're not ofthe tortoise in this case.
You're the
emily-sander_1_12-17-2024 (23:46):
Yeah, you need to be a hare with your
butt on fire running as fast asyou can.
Um, okay.
So let's just say, like, I knowthe probability is low, but
someone has pre institutionalmoney and then P.
E.
money.
Let's just say that.
How does the makeup of like thewaterfall and the board seats
(24:08):
and all of that go down when youhave like an initial round of,
you know, Of fun of funding andinvestment.
And then you have PE come in.
How does that all get shakenout?
ed-barton_1_12-17-2024_160 (24:18):
I'll give the, it depends.
Um, we went through Rory and Iwent through that exact scenario
where we were at a company thatwas essentially angel backed, by
folks as famous as like thechairman of the federal reserve
was one of the, was a partner ofone of our board members, a
retired chairman of the federalreserve.
So it was a, you know, highlysophisticated board.
(24:38):
Um, they were angel investors orinvestments were seven figures.
Um, and it funded a very, very,very successful company.
Um, when
squadcaster-jidf_1_12-17-2 (24:47):
It's always funny how money has a way
of sniffing out more money.
You know what I mean?
Like
ed-barton_1_12-17-2024_ (24:51):
Follow, follow the,
squadcaster-jidf_1_12-17-202 (24:52):
it just, it's just.
ed-barton_1_12-17-2024_1 (24:53):
money.
squadcaster-jidf_1_12- (24:54):
exactly.
ed-barton_1_12-17-2024_160 (24:55):
and, and the, uh, when the PE guys
came in, a number of them took,took the, um, took the money and
left.
but what the founder did was heessentially negotiated a second
board seat.
So he said, I've got two boardseats.
And he took.
of the more sophisticated boardmembers of the folks who cashed
(25:19):
out and brought them back on asa board
squadcaster-jidf_1_12-17- (25:21):
Yeah.
ed-barton_1_12-17-2024_16 (25:22):
Well, otherwise it becomes kind of a
negotiation during the deal of,okay, how many board seats are
there going to be?
What's percentage of whatpercentage sold?
And then, you know, is theregoing to be a pro rata
allocation of board seats anddepending on what that pro rata
Percentage looks like you mayend up with a board that expands
from four to 14 Or you may endup with a board that goes from
(25:44):
four to five but the old boardReduces down to two seats and
the pe guys come in with threeif they got majority control
emily-sander_1_12-17-2024_16 (25:53):
Do you want to quickly explain pro
rata?
Yeah.
Yeah.
ed-barton_1_12-17-2024_16052 (25:56):
in proportion to your ownership
percentage
squadcaster-jidf_1_12-17- (26:00):
Yeah.
ed-barton_1_12-17-2024_16052 (26:00):
In that particular case,
squadcaster-jidf_1_12-17 (26:03):
That's why, uh, you know, you hear
dilution in that term so much onthe early stage businesses is
because You know, you're, youjust keep splitting a company up
in terms of allocation ofownership, but, you know, you
got to be really careful as afounder, how much you're giving
up for how much money you'retaking on, you know, I feel like
kind of at the private equitylevel, it's a little, you know,
(26:24):
you're, you've already done thatenough and at a point it becomes
a little more.
Straightforward at that, at thatlevel.
But, um, but yeah, like earlyon, every dollar you take on,
you gotta be very careful aboutwhat you're giving up for that
dollar, but it gets harder tojustify that based on how do you
value your company?
That's pre revenue, pre idea,pre whatever, you know?
(26:45):
So
emily-sander_1_12-17-2024_16 (26:47):
So would you say, you mentioned
this earlier, but at the VCphase, the founder is still
largely quote unquote incontrol, like they are, are they
the majority owner, they're likethe head of the board, they can
make decisions about who's onthe board and decisions about
the company
squadcaster-jidf_1_12 (27:04):
typically
emily-sander_1_12-17-2024_1 (27:05):
and things like this, you know, And
then when they move into P.
E.
land, things change.
ed-barton_1_12-17-2024_160 (27:10):
even on
emily-sander_1_12-17-2024_16 (27:11):
so
ed-barton_1_12-17-2024_1 (27:11):
things will change.
There
squadcaster-jidf_1_12-17-20 (27:13):
Oh, definitely.
Yeah.
Yeah.
ed-barton_1_12-17-2024_160 (27:15):
the, where the founder, where the
founder dilutes is diluted downto the minimus.
Amounts, but that de minimisamount may be, you know, still a
very lucrative
emily-sander_1_12-17-2024 (27:27):
sure.
ed-barton_1_12-17-2024_160 (27:27):
They may
squadcaster-jidf_1_12-1 (27:28):
Smaller
ed-barton_1_12-17-2024_1 (27:28):
voting rights,
squadcaster-jidf_1_12-17- (27:29):
piece of a massive pie.
Right.
Yeah.
ed-barton_1_12-17-2024_160 (27:31):
it's normally when you've got
something going to the moon.
So everybody wants on board.
So you, you hear about thethings like Facebook where like
Zuckerberg still got controlbecause he's got restricted
shares that have super, supermajority rights or super
majority voting rights and allthis other stuff.
That's unusual.
And that's, that becomespossible only if that VC Backed
(27:51):
company takes off like a rocketship is a rocket ship.
And when you're going out forsubsequent funding rounds,
you're pricing those at a, at apremium price.
People are clamoring to get onboard and you're the, the seller
becomes the dictator of terms
emily-sander_1_12-17-2024_ (28:07):
Hmm.
ed-barton_1_12-17-2024_1605 (28:07):
to, as opposed to really having to
go out like a P normally you'regoing out, like I'm selling the
company and you're doing awindow dressing and stuff.
Some of the VC backed companies,when they're taking off like
that, when they're unicorn typecompany, they're going to end
up.
Where they are in the driver'sseat as to what those
transactions look like.
emily-sander_1_12-17-2024 (28:24):
Yeah.
I mean, most of the time it'slike a founder in their basement
saying, please give me anyfunding you can.
But I think Rory mentionedearlier, like if you have a
proven entrepreneur who justlike is serially like successful
and they're doing their next bigthing, B.
C.
's like want in on that.
So the dynamics flip a littlebit.
If you're if a founder islistening to this, And wants to
(28:46):
kind of keep track of, okay, I'mkind of hearing like VC as an
option, or I could go straightto PE and grow it myself.
And there's different, there'sjust different trade offs.
There's no right or wrong perse.
It's just your setup and again,why you're doing it, what you
want, what are some other thingsthat they should be thinking
about?
ed-barton_1_12-17-2024_16052 (29:02):
is a right or wrong, actually, I'll
squadcaster-jidf_1_12-17- (29:04):
There is.
ed-barton_1_12-17-2024_16 (29:04):
There is
squadcaster-jidf_1_12-17-2024 (29:05):
I
emily-sander_1_12-17-2024 (29:05):
Okay.
squadcaster-jidf_1_12-17- (29:05):
this.
Yeah.
I know where you're going.
ed-barton_1_12-17-2024_16 (29:07):
right is you have to pick which kind
of your adventure wisely.
So it's if you are a rocket shipor you think you're going to be
a rocket ship or your businessis structured as a, as an idea
that could, you know, be abillion people want to do it.
VC is the only way you're goingto go.
(29:28):
It's the only folks that aregoing to listen to you.
It's the only people who aregoing to be willing to write a
check to watch you burn it withthe hopes that you're going to
achieve a billion dollar.
Or a billion dollar valuation ona PE side, if you bootstrap the
thing, or you're, you're like, Idon't see how this becomes a
billion dollar company.
This is a good, good business.
That's in a, that's got a goodniche.
(29:48):
That's going to really growthat, you know, could grow at
20, 30, 40 percent a year withsome capital and, and some
expertise.
That's a PE backed business.
Venture is not going to beinterested.
And you can burn a lot of time,energy, and effort trying to
chase the wrong money.
squadcaster-jidf_1_12-17- (30:02):
Yeah, we're chasing any money to be
honest.
So, I mean, I'd say the other, Ithought we were going to go
here.
I agree with what you said, butI would also say the other right
answer is bootstrap it all theway.
Don't take on extra money.
Don't take on outside money.
If you can, if you can get it tothe point where you don't need
that, like, you know, operatingcash flow or should say, you
(30:23):
know, outside investment just tokeep the lights on and you can
bootstrap it to the point of,you know, You know, PE level,
uh, growth capital, do that.
Don't mess around in the middle.
Like, if you can bootstrap it,bootstrap it.
You know, it's going to be bestfor your outcome.
You're going to retain thecompany much longer and have a,
have much more leverage and haveto give up as much along the
(30:45):
way.
emily-sander_1_12-17-2024 (30:47):
Okay.
If someone is entertaining VC orPE money, what are some things
they should look at to protectthemselves in terms of like, I
don't want to get diluted or Idon't want someone to put one
past me where they give me likethis template.
I don't understand.
So I sign it.
What are some key things theyshould look for?
squadcaster-jidf_1_12-17- (31:03):
going back to, uh, I believe a couple
episodes ago, we said, get yourteam around you.
know, you be, you want to beworking with good lawyers, good
advisors, You know to help youalong the way if you try to you
know, if you're if you're ifyou're not experienced in these
things you will get taken to thecleaners.
Um, so make sure you've got goodrepresentation you cut a deal.
(31:27):
I mean, that's the first, firstorder of business.
ed-barton_1_12-17-2024_16 (31:30):
Yeah, there's, and there's a couple,
couple other things even beforeor in parallel to putting that
team around you.
Um, the first one is talk tosome folks who have been there,
done
squadcaster-jidf_1_12-17- (31:41):
Yeah.
ed-barton_1_12-17-2024_160 (31:42):
from the founder seat.
So there's, you know, different,different, especially in areas
like Seattle here where you'vegot a lot of founder, founder
built businesses and folks whohave gone through this exercise
and succeeded and failed.
You've got resources to be ableto kind of sit down and hear the
stories.
I mean, you're hearing ourstories and we've been through
it.
There's here in, you know, ifyou just think about Seattle
(32:02):
alone, there's probably 5, 000other people
squadcaster-jidf_1_12-17- (32:04):
Yeah.
ed-barton_1_12-17-2024_1605 (32:05):
sit down and have similar
conversations.
Pick those brains.
The other is there's a lot of,you know, kind of shameless plug
for the book, but there's a lotof books out there that, you
know, talk about private equity.
You know, we not a lot onprivate equity, which is why,
you know, we're, we're so goodat helping people, but there's,
you know, private equity and alot of startup.
(32:27):
Um, you know, how to fund yourstartup and, you know, some of
the private, the, the privatemoney and how to raise seed
rounds, they're not going to getyou from here to there.
And there's no replacement forhaving the right resources
around you, but they will giveyou an idea of the environment,
the type of questions to ask,and kind of a, at least a
framework from which to be ableto operate.
(32:48):
And so I,
squadcaster-jidf_1_12-17- (32:49):
Yeah.
ed-barton_1_12-17-20 (32:50):
Recommend, I'd recommend that in parallel
with trying to determine whoyour advisors are and make sure
you get a good team around you.
emily-sander_1_12-17-2024_1 (32:59):
all right.
So assemble your team, get yourresources going.
There's places like startupgrind in Seattle.
That's literally for founders,uh, doing the startup thing and
they have tremendous resourcesthere.
There's platforms like YCombinator where you can get
connected with the people youneed to, uh, podcast wise,
you're in the right place.
So great job.
And then book reading wise,there are.
(33:20):
Dozens, probably hundreds.
But the one you want to startwith is on ramp to exit.
And we'll have a link for thatin the show notes it's available
on Amazon and anywhere books aresold.
And we will catch you next timeon the private equity experience
podcast.
Thanks guys.
squadcaster-jidf_1_12-17- (33:34):
Thank you.
Are we ready to rock and roll?
This is like full of acronyms.
It's like,
squadcaster-jidf_1_12-17- (00:37):
let's
emily-sander_1_12-17-2024_ (00:38):
it's like the one, two, threes of VC
and series ABC into PE firms.
So here we go.
squadcaster-jidf_1_12-17- (00:46):
Yeah,
emily-sander_1_12-17-2024 (00:46):
Strap in boys and girls.
ed-barton_1_12-17-2024_16 (00:48):
baby.
squadcaster-jidf_1_12-17- (00:48):
Yeah,
emily-sander_1_12-17-2024_1 (00:51):
But I think it's a good thing to
talk about.
Cause like, When I go, Hey, youknow, private equity experience,
we're talking about the PE worldand they're like, Oh, so like,
like VC.
And I'm like, kind of, sort of,it's mostly like VC comes
beforehand generally, but how dowe want to get people into this?
ed-barton_1_12-17-2024_16 (01:09):
maybe never comes at all.
squadcaster-jidf_1_12-17 (01:10):
right.
emily-sander_1_12-17-202 (01:11):
That's true too.
ed-barton_1_12-17-2024_16 (01:13):
shows up on the scene.
Or PE never shows up on thescene.
It's like, it's a, it's a wholeecosystem where some, some feed
on the slower, weaker animals.
some
emily-sander_1_12-17-2024_1 (01:26):
Are you the limpy gazelle or are you
the?
ed-barton_1_12-17-2024_1605 (01:28):
the fast
emily-sander_1_12-17-2024_16 (01:30):
Oh my god.
squadcaster-jidf_1_12-17-202 (01:31):
Mm hmm.
emily-sander_1_12-17-2024 (01:32):
Okay.
squadcaster-jidf_1_12-17-2024 (01:33):
I
emily-sander_1_12-17-2024 (01:33):
Okay.
squadcaster-jidf_1_12-17-2 (01:33):
some similarities, i.
e.
that people that invest in thesecompanies generally have an idea
that they want to make a returnon that investment, but you
know, that's some ways where thesimilarities might end.
I mean, there, there, there aretwo different beasts to take
that analogy a step forward.
Uh, You know, um, and a lot ofit has to do with where the
company's at in its life cycle.
Um, a lot of it has to do with,you know, um, some
(01:56):
characteristics of the business,whether it money, doesn't make
money, you know, um, all thesefactors that go into
emily-sander_1_12-17-2024 (02:04):
Okay.
squadcaster-jidf_1_12-17-20 (02:05):
PE.
emily-sander_1_12-17-2024_16 (02:06):
So for like those who are like,
what the heck, what the hell areyou talking about?
BC is venture capital and it'sanother source of wealth.
Capital.
It's another source ofinvestment and it works in a lot
of ways, similar to P E.
So like broad strokes, samegeneral structure and makeup.
It typically comes earlier inthe process.
(02:30):
So like startups, um, might getangel investors and then they
might get VC funding and thenmaybe they stay there forever.
And maybe a subset of that goeson to then have P E.
Investors.
squadcaster-jidf_1_12-17- (02:45):
Yeah.
I
emily-sander_1_12-17-2024_1 (02:46):
are broad, broad strokes.
squadcaster-jidf_1_12-17-2 (02:47):
look at it is, you know, I've read,
there's a lot of statistics outthere, but the ones that stick
out in my mind are, know, only10 to 20 percent of all venture
backed companies.
successfully exit to anacquisition or an IPO.
So you kind of think about thatacquisition piece being where PE
oftentimes will come in.
(03:08):
Um,
emily-sander_1_12-17-2024_1 (03:08):
And then
squadcaster-jidf_1_12-17- (03:09):
takes a while to get there at times,
you know, um, for businesses andthey may never get there like Ed
said.
ed-barton_1_12-17-2024_16 (03:16):
Yeah, the, the
emily-sander_1_12-17-2024_ (03:16):
the,
ed-barton_1_12-17-2024_16052 (03:17):
PE side.
You're looking at businesseswhere they expect to have about
a 80 percent to 90 percentsuccess rate.
And, or, you know, if you wantto use a baseball analogy, I'll
use a Mariners baseball analogy.
emily-sander_1_12-17-2024_16 (03:32):
oh boy,
ed-barton_1_12-17-2024_16052 (03:33):
PE is like each row, they get up,
they get a lot of hits,
squadcaster-jidf_1_12-17- (03:36):
Yeah.
Yeah.
They can.
Yeah.
ed-barton_1_12-17-2024_ (03:40):
they're moving around the bases.
They're gonna steal a base hereor there, but they're really
hitting for average.
if you've got someone like,we'll call it an Adrian belt
tray,'cause I'm gonna give my,give my age where their batting
average, while they were inSeattle, everywhere else was
fine while they were in Seattle.
Might be down around two 30,they can hit the long ball.
(04:01):
And so they're up there kind ofswinging away and in the four
hole trying to trying to knockout the long ball.
So the difference is venturefirm, they're, they're looking
for home runs, they're lookingfor 10 X, 12 X returns.
And they recognize, like Rorysaid, that 80 percent may end up
at zero, or they'll be lucky toget their capital back.
(04:22):
If that was in P.
E.
land, that would becatastrophically poor.
Batting average, they want an 80to 90% batting average, but
they're looking for, you know,20, 25% returns, not, know,
1000% returns on 10% of theportfolio.
emily-sander_1_12-17-2024_1 (04:38):
but they have more swings at bat.
Right.
ed-barton_1_12-17-2024_160 (04:41):
Hard to say.
I, I, I would, I would sayyou've got a much larger pool of
potential venture, potentialventure.
Um.
just because almost any startup,especially in the tech side,
tend to be a venture potentialventure investor.
Whereas as Rory noted on the P.
E.
side, they're looking for farmore mature organizations where
(05:04):
they're probably making money,you know, and so it's a it's a
smaller universe, a little
emily-sander_1_12-17-2024_1 (05:09):
But don't they have, well, okay.
I was going to say, don't theyhave more companies in one fund
or is that not the case
squadcaster-jidf_1_12-17-2024 (05:20):
I mean, let's, let's kind of take
it up another level.
So We talked about thefoundation of private equity
funds being the LP investors,right?
venture funds also have LPinvestors.
And oftentimes those LPinvestors have a private equity
(05:40):
strategy and a venture strategy.
They don't look at them as thesame class of investment, higher
risk, higher return, like Edsaid.
So allocating capital from LPsYou know, spans both PE and
venture.
So, you know, whether the sizeof the fund or the number of
portfolio companies in the fundthat may vary or may be similar
(06:02):
across, you know, differentparts of the market, larger
institutional, however you wantto put that, um, it's just a
different class of investmentaltogether.
You know, you, it's a privateinvestment, which is why you
kind of put those two in thesame bucket.
But, you know, as far as therisk return profile, what it
comes down to is they are quitedifferent.
(06:24):
Um, and you know, some would sayventure being more speculative.
emily-sander_1_12-17-2024_ (06:28):
when the Orissa laws passed in the
eighties that allowed 10 percentinto high risk, high risk
vehicles, did that, does thatinclude both VC and PE or just
one or the
squadcaster-jidf_1_12-17-2 (06:40):
Ooh, that's a good question.
I bet Ed's got an answer tothat.
I don't.
ed-barton_1_12-17-2024_16052 (06:44):
In general, in general, yes.
Um, because the risk is drivenas much by liquidity risk as it
is by
squadcaster-jidf_1_12-17- (06:51):
Yeah.
ed-barton_1_12-17-20 (06:51):
perception of, this perception of, oh, my
gosh, these are small companies.
It's really how liquid howquickly can you turn that
security into cash?
And so that that's the, that's ahot.
A higher risk.
And so as a result, that's, theygenerally will fit in that same
bucket.
emily-sander_1_12-17-2024 (07:10):
Okay.
squadcaster-jidf_1_12-17-20 (07:11):
you know, from a founder's
perspective too, right?
Like more likely that a founderwill take on venture.
Investment, but give up less ofthe company to do so.
In other words, depending onthat series or where that, you
know, VC investment comes in,founders still controls most, a
lot of the company by design,uh, when you get towards PE, as
(07:34):
we've talked about, you know,PE's mostly taking a control
position.
At that
emily-sander_1_12-17-2024 (07:40):
Okay.
What's, so what are like, whatare the main things that are
similar between VC and PE andwhat's the, what are the main
differences?
ed-barton_1_12-17-2024_16052 (07:49):
So I'll hit, I'll hit the biggest
similarity, which is they'reboth a source of growth capital,
emily-sander_1_12-17-2024 (07:54):
Okay.
ed-barton_1_12-17-2024 (07:55):
they're, they're both ways that you can
infuse cash into the business.
One of the biggest differencesthat is related to that is
generally on a private equityside, the ownership The, the
ownership selling ownership istaking cash out of the business
and putting it in their pocket.
Generally in venture, there's nocash going out of the business
(08:17):
in bleeding
squadcaster-jidf_1_12-17- (08:18):
Yeah.
ed-barton_1_12-17-2024 (08:18):
infusing additional cash to keep it alive
and allow it to grow to the nextstage.
So the.
They're both sources of capital,but the biggest difference is
how that capital is generallygoing to be used on the, on the
backside of the transaction.
squadcaster-jidf_1_12-17-2024 (08:36):
I was just gonna add it from
slightly different angle is, youknow, comes back to the
investment thesis for, you know,both of those categories.
So look, venture investmentoften times is just a pure bet
on an idea or a founder that'sbeen successful in the past.
I've heard of and, and sort ofbeen close to business that are
(08:58):
not only pre revenue, but likepre product.
you basically are dealing with aserial entrepreneur that people
put trust in and they're willingto roll the dice that, hey, this
person has done three businessesand exited successfully.
Why can't they do a fourth?
And I'm willing to put some,some money behind that.
PE is a much more.
Much different approach, I wouldsay not to say that they don't
bet on management teams, butit's more management team and
(09:21):
also a viable business and, youknow, not only viable business,
but, you know, profitable at thetime they invest, you know, so I
guess a simple way to thinkabout it is maybe, know, And
we've talked about it, you know,to be attractive to PE group,
you've got to be generallycashflow positive and have a
certain amount of revenue tostart, uh, before, you know, it
(09:42):
makes sense for PE group to comein.
emily-sander_1_12-17-2024_1 (09:45):
You have to be a little bit more
proven.
squadcaster-jidf_1_12-17- (09:46):
Yeah.
That's a good way to put it.
Exactly.
Right.
Yeah.
emily-sander_1_12-17-2024 (09:49):
Okay.
I think another thing peoplehere tossed out are like Series
A and Series B and Series C.
And in my experience, the waythose are used really depends on
the VC fund and like the exactsituation.
There's no like standardization.
ed-barton_1_12-17-2024_160 (10:04):
It's a,
emily-sander_1_12-17-2024 (10:04):
Yeah.
ed-barton_1_12-17-2024_16 (10:04):
order in which,
emily-sander_1_12-17-2024_ (10:06):
Yes.
Sure.
ed-barton_1_12-17-2024_16052 (10:08):
A, B,
squadcaster-jidf_1_12-17-2024 (10:08):
I had an argument about this today
with a client of mine.
It was like, you know, there's aperspective that it has to do
with much money's been raised todate.
There's a perspective that hasto do where the company's at as
a business in its own lifecycle, you know, so yeah, it's
it's uh, yeah, it just really isjust a sequential, uh, sequen
emily-sander_1_12-17-2024 (10:25):
Yeah,
squadcaster-jidf_1_12-17 (10:26):
rounds that are priced, basically.
ed-barton_1_12-17-2024 (10:28):
normally your a round is going to be your
first institutional round.
And
squadcaster-jidf_1_12- (10:32):
Correct.
ed-barton_1_12-17-2024_16052 (10:33):
be seed
squadcaster-jidf_1_12-17- (10:34):
Yeah,
ed-barton_1_12-17-2024_16052 (10:34):
to essentially seed the business,
to get it to, to, to plant theseeds.
And then it starts to grow.
emily-sander_1_12-17-2024 (10:40):
okay.
ed-barton_1_12-17-2024_1605 (10:40):
got A through, A through Z rounds
after that.
emily-sander_1_12-17-2024_ (10:45):
I've seen some cases where like it's
just at the discretion of thefund.
There's no like you hit this.
Sometimes I've seen there youhit this milestone, and then
that opens up the potential forfurther funding.
But I've mostly seen it atdiscretion.
Is that what you guys have seenor other models?
squadcaster-jidf_1_12-17- (11:02):
yeah, it's as you say, it's, it's kind
of a discretionary thing,
emily-sander_1_12-17-2024 (11:07):
Okay.
squadcaster-jidf_1_12-1 (11:07):
targets and milestones for different
businesses and different funds.
There's no universal.
emily-sander_1_12-17-2024 (11:12):
Okay.
So let's move into P.
E.
So let's do kind of like a recapreally quickly.
So founder starts a company,like it's just a, it's just an
idea and a dream.
And then they get family andfriends money and they start a
little office in their garageand then they get pre seed money
or does angel investor can comein there too.
ed-barton_1_12-17-2024_16 (11:34):
Seed,
emily-sander_1_12-17-20 (11:34):
angels, pre seed,
ed-barton_1_12-17-2024_ (11:36):
Friends and Family, that's all kind of
the pre institutional money.
emily-sander_1_12-17-2024_1 (11:39):
pre institutional money.
squadcaster-jidf_1_12 (11:40):
handshake type of deal, you know, like the
back of the envelope, you know,let's, let's pass the hat around
and get some money in.
Yeah.
emily-sander_1_12-17-2024 (11:47):
Yeah.
But if you've got like VC, likeif you're in your series B, like
you've got like an office,you've got people, you've got
recruiting and hiring and, andteams going on.
And then there comes a pointwhere I guess about 20 percent
will say, okay, we want to takea look at taking on Additional
investment from a private equityfund.
What does that transition looklike?
(12:09):
What does that decision looklike?
How, when, why would you dothat?
Ed go.
ed-barton_1_12-1 (12:15):
Interestingly, you're, a lot of times you're
not going to see those twostreams cross early.
generally what you're going tosee is a company may be
initially VC funded.
And get to a certain pointpublic, then begin to kind of
stagnate as a public company.
(12:36):
And at that point they may getpicked up by private equity and
taken private.
squadcaster-jidf_1_12-17 (12:39):
right.
ed-barton_1_12-17-2024_1605 (12:40):
Um, but you tend not to see, a VC
backed company.
know, again, they will, you willhave VC back companies as zombie
themselves where
squadcaster-jidf_1_12-17 (12:49):
That's right.
No
ed-barton_1_12-17-2024_160524 (12:50):
a certain point, they're spending
enough cash flow where theywon't die, but they're, they're
not spending enough cash flowwhere the private equity guys
are looking at this as a, youknow, really good investment
for, for that fund.
They may at that point, flip itout to, um, flip it out to a
private equity fund that islooking to either in kind of
bring that.
That technology or that companyinto their portfolio generally
(13:14):
is a
squadcaster-jidf_1_12-17- (13:14):
quasi strategic buyer style.
Yeah.
ed-barton_1_12-17-2024_16052 (13:17):
of their portfolio companies, but
the two tend to, once you startoff again, once you kind of
start off in a venture world,you're generally going to fly or
die.
It's, it's either taken off oryou're going to blow up.
if you in the private equityworld, you've generally
bootstrapped yourself to thepoint where, you know, the
company's, the company's gottento a point where private equity
(13:39):
sale becomes a method ofliquidity, gaining liquidity for
the ownership.
Um, as opposed, and you'regrowing at a nice steady 25, you
know, 30 percent
squadcaster-jidf_1_12-17- (13:49):
Yeah.
30 and
ed-barton_1_12-17-2024_160 (13:50):
rate as opposed to 300 percent
squadcaster-jidf_1_12-17-20 (13:52):
30.
Yeah.
ed-barton_1_12-17-2024_160 (13:53):
Yep.
emily-sander_1_12-17-2024_16 (13:54):
So is it more likely that like as a
founder, you would build acompany for go VC funding?
Cause you're doing fine byyourself.
You have a, you have a provenproduct and company up and
running and then you go directto PE.
ed-barton_1_12-17-2024_16 (14:07):
Yeah.
You would not see, I mean,interestingly, the way you frame
that up provides a really.
Interesting insight into whogoes for what.
If you have the capital tobootstrap your startup to the
point where you can get the PEVC, wouldn't even look at it.
VC looks at companies where it'slike, if this thing takes off,
(14:28):
we need to just pour capital onthis thing until, you know,
we're watching the flames as itburns, you know, but we know
that at some point this is goingto turn into a rocket ship, you
know, that's
emily-sander_1_12-17-20 (14:38):
They're going for the moonshot, like
moonshot.
ed-barton_1_12-17-2024_1605 (14:41):
and so normally a typical founder
doesn't have the capital to dothe moonshot.
And so that's where the VC comesin.
If they have the capital,they're probably at a good,
steady, solid growth rate, youknow, that 30 percent growth
rate, 40 percent growth rate,they're self funding.
And that's a classic PE typestructure.
That's a classic PE type target.
squadcaster-jidf_1_12-17- (15:00):
Yeah.
emily-sander_1_12-17-2024 (15:02):
Okay.
squadcaster-jidf_1_12-17- (15:02):
Cause
emily-sander_1_12-17-2024_ (15:03):
And,
squadcaster-jidf_1_12- (15:03):
remember what we talked about, you know,
with, uh, With private equity,so much of the deal deals that
they do are dependent on addingleverage to a business where,
you know, if you don't have cashflow to support a, you know, um,
you know, newly, issued debt,then, you know, it's not going
to work.
And that's like, largely thecase for a lot of startups that
(15:23):
are literally have no cash, youknow, so, or they're burning
through cash at a clip that'snot going to support a bank
loan, you know, so,
emily-sander_1_12-17-2024_1 (15:32):
and the way the math works for like
the VC fund is, let's say youhave 10 companies
squadcaster-jidf_1_12-17- (15:36):
yeah.
emily-sander_1_12-17-2024_1 (15:36):
you just know statistically nine of
them are going to just crash andburn and be nothing, but the
10th will do a moonshot that andthe, the gains on that one will
cover all the other losses thatyou've taken out of the 10.
That's kind of the game they'replaying.
ed-barton_1_12-17-2024_1605 (15:50):
the losses.
Plus give you a 30
emily-sander_1_12-17-2024_ (15:52):
Yes.
squadcaster-jidf_1_12-17- (15:52):
Yeah,
emily-sander_1_12-17-2024_ (15:53):
Yes.
squadcaster-jidf_1_12-17- (15:53):
yeah,
ed-barton_1_12-17-2024_1 (15:54):
thing.
emily-sander_1_12-17-2024_ (15:55):
Yes.
Okay.
squadcaster-jidf_1_12-17-2 (15:57):
just a, I just, you know, there's no
other way to say it.
There's just a, a differentfeeling about, you know,
optimism in, in startups andventure backed companies.
Then a P a P is much moreapproached as kind of like a.
a financial play rather than a,you know, like a growth story,
(16:17):
you know, um, uh, it, thatsounds very qualitative and it
is, but that, I think that's a,that's a reality.
People tend to be either venturepeople or P people.
I've begun working with some,some, some early, really early
stage companies and it iscompletely different.
Then my experience having workedin PE for 20 years, it's, it's
(16:38):
definitely a different,perspective.
Um, not, not one is not wrong orone is not, uh,
emily-sander_1_12-17-202 (16:44):
Right.
Appreciate it.
squadcaster-jidf_1_12-17-20 (16:45):
uh, better.
It's just different.
You know,
ed-barton_1_12-17-2024 (16:47):
Finance, finance guy does not like.
The burning cash
squadcaster-jidf_1_12-1 (16:51):
there's a little, yeah, I mean, yeah.
If nothing else, burning cash isthe, you know, it just, it just,
no matter what, it never makessense to me, but you know,
ed-barton_1_12-17-2024_160 (17:00):
back to the analogy I used it the
earlier on the baseball side,you know, on a VC, you're,
you're generally going to have,you know, they're, they're not
gonna have a 1 in 10.
They're likely to have about a400, you know, a 40 percent but
of that 40%, if it's 10.
the four of that actually don'tflame out, you're going to have
two zombies in there that arebasically going to be, they're
(17:21):
going to be surviving, butthey're not going to give them a
real return.
They may have a negative return,but they won't die.
got one.
That's going to be a nice, youknow, 30, 40%.
50 percent annualized return.
And then you're going to, theirgoal is to have one out of 10 or
one out of 20 be a thousandpercent return, you know, 10 X,
(17:41):
20 X, and that's really the, andthen you're going to have four
or five of them that are notgoing to.
you know, they're going to go tozero.
emily-sander_1_12-17-2024 (17:50):
Yeah.
So wait.
So in your analogy was Ichiro aPE firm
ed-barton_1_12-17-2024_1605 (17:55):
No, each row.
Yeah.
Each row is more of a PE firm.
He's really like, he's sittingfor singles and doubles.
It's on base.
It's moving around the bases.
It's
emily-sander_1_12-17-2024_1 (18:02):
and it's more predictable and
consistent and like, so if youhave like a good stretching
routine and habits that you doto like get yourself, your swing
might look changed to anAmerican audience, but like, Oh,
it works.
So keep doing it.
Amazing.
That's Ichiro.
Okay.
So that's PE firm.
ed-barton_1_12-17-2024_1605 (18:21):
The other side to the, to the
equation on the, on the privateequity side is, you know, if,
like I said, if they end up witha 40 percent hit rate, they're
failing,
squadcaster-jidf_1_12-17-20 (18:32):
Big time.
ed-barton_1_12-17-2024_16 (18:33):
hard.
squadcaster-jidf_1_12-17- (18:33):
Yeah.
ed-barton_1_12-17-2024_16 (18:34):
mean, they, they should be in the
eighties to nineties.
Um, but the, the concept whereyou've got this strange area
where the two will play witheach other, like I said, is, is
like the zombies in the, andthat's a, that's a technical
term
squadcaster-jidf_1_12-17- (18:48):
Yeah.
ed-barton_1_12-17-2024_1605 (18:49):
DC, the zombies, where, uh, They
just won't die, they're not goodenough to, they're not, they're
not alive and they're not dead.
They're just kind of there doingtheir thing, but they just, and
I've got one of the, one of thecompanies I'm working with now
is a zombie.
It's essentially a company wherethey're down to like their last
four or five employees.
They've got, you know, they're,they're got enough revenue to
(19:10):
pay the bills.
They can't grow and they, andwe're not shutting them down.
And so they're just kind ofcranking along
emily-sander_1_12-17-2024_1 (19:17):
So.
Thank you.
Okay.
ed-barton_1_12-17-2024_16 (19:19):
Break even.
emily-sander_1_12-17-2024_16 (19:20):
So let's take the analogy of, of 10
companies and I just picked 10cause it's easy math.
So where the VC wants one ofthem or a small percentage to go
like a thousand percent for a PEfirm, the equation is almost
flipped where it's like they'lltake one or two clunkers, but
the rest have to hit at like twoto five X.
Is that generally
ed-barton_1_12-17-2024_16 (19:40):
Yeah.
emily-sander_1_12-1 (19:40):
acceptable?
So,
ed-barton_1_12-17-2024_1605 (19:41):
two to five is, is pretty legit over
a five year hold.
And, and the, even the clunkers
squadcaster-jidf_1_12-17- (19:49):
Yeah.
ed-barton_1_12-17-2024_16052 (19:49):
my experience.
Um, and Rory and I have workedwith some of the same private
equity firms.
Even the clunkers areunderwritten so that if they
have to
squadcaster-jidf_1_12-17- (19:56):
Yeah.
ed-barton_1_12-17-2024_160 (19:57):
zero
squadcaster-jidf_1_12-17 (19:58):
That's what I
emily-sander_1_12-17-2024 (19:58):
Yeah.
squadcaster-jidf_1_12-17-2024 (19:59):
I mean,
ed-barton_1_12-17-2024_16 (19:59):
still gonna be able to sell out of
those and get.
emily-sander_1_12-17-2024_ (20:01):
They make it so they can't lose it.
And
squadcaster-jidf_1_12 (20:03):
directors at a VC firm literally say, you
know, I'm looking for that oneor two out of 10 to really hit,
know, zero directors at a PE tosay, I'm going to be accepting
one to two losses on myportfolio.
They're not, they're going to belike, I want about a thousand.
I may make, you know, One and ahalf to two X on a couple of
these, but I'm making moneybecause I'm at a financial,
(20:26):
financially engineer my way outof a return or into a return, no
matter what.
ed-barton_1_12-17-2024_1605 (20:30):
The one private equity firm that the
three of us all worked with whenI would go to their annual
meetings and, and get a chanceto take a look at what the
performance of those portfoliocompanies were out of like 70
four funds, may have had twothat went to zero.
Yeah,
emily-sander_1_12-17- (20:50):
sometimes they'll flip them into dividend
plays, which we can talk about.
Like the timeline stretches wayout and they just take dividends
month over month and the wholethesis and how you operate that
company changes, but they canflip them into that.
squadcaster-jidf_1_12-17- (21:03):
Yeah.
emily-sander_1_12-17-2024_160 (21:03):
I remember
squadcaster-jidf_1_12-17-2 (21:03):
mode in that case.
emily-sander_1_12-17-202 (21:05):
turtle mode.
I love that.
Okay.
Turtle mode.
Oh my gosh.
Um, but I remember us threetalking about like, Hey, we were
at this place with the PE firmand we were like, Out of like, I
think it was 12, 12 companies inour fund.
I can't remember, but we didn'twant to be like the very last
(21:25):
certainly, but we didn't want tobe like the very first there's
like a sweet spot where if youwere like second or third best,
like they just, they just keepgiving you what you need, like
anything you need, like, let usknow, but like they let us run
the company and that was likethe sweet spot.
squadcaster-jidf_1_12-17-2 (21:39):
keep getting whatever you need.
ed-barton_1_12-17-2024_ (21:41):
that's,
squadcaster-jidf_1_12-17-2 (21:42):
been a middle or back of the packer
or something like that.
Cause it's always been a grind.
ed-barton_1_12-17-2024_16 (21:46):
might be a bit of a stretch.
But yeah, the one
squadcaster-jidf_1_12-17- (21:47):
Yeah,
ed-barton_1_12-17-2024_1605 (21:48):
one of three of us worked at was a
solid, it was a solid performer.
It was mid pack
squadcaster-jidf_1_12-17 (21:51):
really good.
ed-barton_1_12-17-2024_1605 (21:53):
Um, and we were largely left alone.
There was always pressure.
How are you going to grow?
Are you
emily-sander_1_12-17-2024 (21:57):
Sure.
ed-barton_1_12-17-2024_1605 (21:58):
How are we going to, you know, they
would re lever the thing.
And Be like, stop, you know, I'mgetting panicked because you're
going to screw up
squadcaster-jidf_1_12-17-2024 (22:04):
I need some breathing room.
ed-barton_1_12-17-2024_16 (22:06):
We're just getting comfortable and now
you're going to throw additionalleverage on dividend dividend
crap out um, and that would beyou know, that's a that's But
you're fairly much left alonenow the last the last P back
back company I ran, we were therun of the litter you know, and
were not left alone.
And it was, you know, callsmultiple times a week on where's
(22:29):
the revenue and how are yougoing to cut more expenses?
squadcaster-jidf_1_12-17- (22:32):
Yeah,
ed-barton_1_12-17-2024_1605 (22:32):
you know,
emily-sander_1_12-17-2024 (22:32):
Like, you don't want to be at the
ends, like the extremes.
Cause,
ed-barton_1_12-17-2024_160524 (22:35):
I don't mind being at the top.
emily-sander_1_12-17-2024_1 (22:37):
but that, I mean, doesn't that come
with its own pressure though?
ed-barton_1_12-17-2024_16 (22:40):
does, but that pressure is good
pressure.
Cause you're going to get paid.
You know, you know, it's, you'regoing to make it rain.
emily-sander_1_12-17-2024 (22:47):
Okay,
squadcaster-jidf_1_12-17-202 (22:47):
is when it's an absolute grind.
And you're like, I do not seethe carrot at the end of this
stick.
emily-sander_1_12-17-2024 (22:53):
fair.
squadcaster-jidf_1_12-17-202 (22:54):
or the light at the end of this
tunnel, whatever analogy or potof gold at the end of this
emily-sander_1_12-17-2024_1 (22:58):
But some of them, some of them get
like real excited by the leaderand it's like, okay, I want, I
was good with like a three X andnow I want like a six to seven.
And they go crazy with it.
Cause they think they can likebeat me.
Make it more and it's like, juststick with the stick with the
program, double down on stuffand let's get a really good
return on this.
squadcaster-jidf_1_12-17- (23:15):
Yeah.
emily-sander_1_12-17-2024_160 (23:16):
X is a good return for everyone
that makes everyone happy at theend of the day.
OK,
ed-barton_1_12-17-2024_16052 (23:21):
in the
emily-sander_1_12-17-2024_16 (23:22):
so
ed-barton_1_12-17-2024_1 (23:22):
world, that's not how it works.
It
squadcaster-jidf_1_12-17-20 (23:24):
No.
ed-barton_1_12-17-2024_1 (23:25):
you're driving all the time
squadcaster-jidf_1_12-17-2 (23:30):
Yes.
ed-barton_1_12-17-2024_16052 (23:31):
up or grow up.
And you've got, you've reallygot no, and it is like,
squadcaster-jidf_1_12-17-2 (23:36):
It's good.
ed-barton_1_12-17-2024_160 (23:37):
like a marathon at a sprinter's pace.
squadcaster-jidf_1_12-17-2 (23:38):
Yep.
emily-sander_1_12-17-2024 (23:40):
there is no turtling up.
You will blow up or grow up.
squadcaster-jidf_1_12-17-2 (23:43):
man.
You are not the, you're not ofthe tortoise in this case.
You're the
emily-sander_1_12-17-2024 (23:46):
Yeah, you need to be a hare with your
butt on fire running as fast asyou can.
Um, okay.
So let's just say, like, I knowthe probability is low, but
someone has pre institutionalmoney and then P.
E.
money.
Let's just say that.
How does the makeup of like thewaterfall and the board seats
(24:08):
and all of that go down when youhave like an initial round of,
you know, Of fun of funding andinvestment.
And then you have PE come in.
How does that all get shakenout?
ed-barton_1_12-17-2024_160 (24:18):
I'll give the, it depends.
Um, we went through Rory and Iwent through that exact scenario
where we were at a company thatwas essentially angel backed, by
folks as famous as like thechairman of the federal reserve
was one of the, was a partner ofone of our board members, a
retired chairman of the federalreserve.
So it was a, you know, highlysophisticated board.
(24:38):
Um, they were angel investors orinvestments were seven figures.
Um, and it funded a very, very,very successful company.
Um, when
squadcaster-jidf_1_12-17-2 (24:47):
It's always funny how money has a way
of sniffing out more money.
You know what I mean?
Like
ed-barton_1_12-17-2024_ (24:51):
Follow, follow the,
squadcaster-jidf_1_12-17-202 (24:52):
it just, it's just.
ed-barton_1_12-17-2024_1 (24:53):
money.
squadcaster-jidf_1_12- (24:54):
exactly.
ed-barton_1_12-17-2024_160 (24:55):
and, and the, uh, when the PE guys
came in, a number of them took,took the, um, took the money and
left.
but what the founder did was heessentially negotiated a second
board seat.
So he said, I've got two boardseats.
And he took.
of the more sophisticated boardmembers of the folks who cashed
(25:19):
out and brought them back on asa board
squadcaster-jidf_1_12-17- (25:21):
Yeah.
ed-barton_1_12-17-2024_16 (25:22):
Well, otherwise it becomes kind of a
negotiation during the deal of,okay, how many board seats are
there going to be?
What's percentage of whatpercentage sold?
And then, you know, is theregoing to be a pro rata
allocation of board seats anddepending on what that pro rata
Percentage looks like you mayend up with a board that expands
from four to 14 Or you may endup with a board that goes from
(25:44):
four to five but the old boardReduces down to two seats and
the pe guys come in with threeif they got majority control
emily-sander_1_12-17-2024_16 (25:53):
Do you want to quickly explain pro
rata?
Yeah.
Yeah.
ed-barton_1_12-17-2024_16052 (25:56):
in proportion to your ownership
percentage
squadcaster-jidf_1_12-17- (26:00):
Yeah.
ed-barton_1_12-17-2024_16052 (26:00):
In that particular case,
squadcaster-jidf_1_12-17 (26:03):
That's why, uh, you know, you hear
dilution in that term so much onthe early stage businesses is
because You know, you're, youjust keep splitting a company up
in terms of allocation ofownership, but, you know, you
got to be really careful as afounder, how much you're giving
up for how much money you'retaking on, you know, I feel like
kind of at the private equitylevel, it's a little, you know,
(26:24):
you're, you've already done thatenough and at a point it becomes
a little more.
Straightforward at that, at thatlevel.
But, um, but yeah, like earlyon, every dollar you take on,
you gotta be very careful aboutwhat you're giving up for that
dollar, but it gets harder tojustify that based on how do you
value your company?
That's pre revenue, pre idea,pre whatever, you know?
(26:45):
So
emily-sander_1_12-17-2024_16 (26:47):
So would you say, you mentioned
this earlier, but at the VCphase, the founder is still
largely quote unquote incontrol, like they are, are they
the majority owner, they're likethe head of the board, they can
make decisions about who's onthe board and decisions about
the company
squadcaster-jidf_1_12 (27:04):
typically
emily-sander_1_12-17-2024_1 (27:05):
and things like this, you know, And
then when they move into P.
E.
land, things change.
ed-barton_1_12-17-2024_160 (27:10):
even on
emily-sander_1_12-17-2024_16 (27:11):
so
ed-barton_1_12-17-2024_1 (27:11):
things will change.
There
squadcaster-jidf_1_12-17-20 (27:13):
Oh, definitely.
Yeah.
Yeah.
ed-barton_1_12-17-2024_160 (27:15):
the, where the founder, where the
founder dilutes is diluted downto the minimus.
Amounts, but that de minimisamount may be, you know, still a
very lucrative
emily-sander_1_12-17-2024 (27:27):
sure.
ed-barton_1_12-17-2024_160 (27:27):
They may
squadcaster-jidf_1_12-1 (27:28):
Smaller
ed-barton_1_12-17-2024_1 (27:28):
voting rights,
squadcaster-jidf_1_12-17- (27:29):
piece of a massive pie.
Right.
Yeah.
ed-barton_1_12-17-2024_160 (27:31):
it's normally when you've got
something going to the moon.
So everybody wants on board.
So you, you hear about thethings like Facebook where like
Zuckerberg still got controlbecause he's got restricted
shares that have super, supermajority rights or super
majority voting rights and allthis other stuff.
That's unusual.
And that's, that becomespossible only if that VC Backed
(27:51):
company takes off like a rocketship is a rocket ship.
And when you're going out forsubsequent funding rounds,
you're pricing those at a, at apremium price.
People are clamoring to get onboard and you're the, the seller
becomes the dictator of terms
emily-sander_1_12-17-2024_ (28:07):
Hmm.
ed-barton_1_12-17-2024_1605 (28:07):
to, as opposed to really having to
go out like a P normally you'regoing out, like I'm selling the
company and you're doing awindow dressing and stuff.
Some of the VC backed companies,when they're taking off like
that, when they're unicorn typecompany, they're going to end
up.
Where they are in the driver'sseat as to what those
transactions look like.
emily-sander_1_12-17-2024 (28:24):
Yeah.
I mean, most of the time it'slike a founder in their basement
saying, please give me anyfunding you can.
But I think Rory mentionedearlier, like if you have a
proven entrepreneur who justlike is serially like successful
and they're doing their next bigthing, B.
C.
's like want in on that.
So the dynamics flip a littlebit.
If you're if a founder islistening to this, And wants to
(28:46):
kind of keep track of, okay, I'mkind of hearing like VC as an
option, or I could go straightto PE and grow it myself.
And there's different, there'sjust different trade offs.
There's no right or wrong perse.
It's just your setup and again,why you're doing it, what you
want, what are some other thingsthat they should be thinking
about?
ed-barton_1_12-17-2024_16052 (29:02):
is a right or wrong, actually, I'll
squadcaster-jidf_1_12-17- (29:04):
There is.
ed-barton_1_12-17-2024_16 (29:04):
There is
squadcaster-jidf_1_12-17-2024 (29:05):
I
emily-sander_1_12-17-2024 (29:05):
Okay.
squadcaster-jidf_1_12-17- (29:05):
this.
Yeah.
I know where you're going.
ed-barton_1_12-17-2024_16 (29:07):
right is you have to pick which kind
of your adventure wisely.
So it's if you are a rocket shipor you think you're going to be
a rocket ship or your businessis structured as a, as an idea
that could, you know, be abillion people want to do it.
VC is the only way you're goingto go.
(29:28):
It's the only folks that aregoing to listen to you.
It's the only people who aregoing to be willing to write a
check to watch you burn it withthe hopes that you're going to
achieve a billion dollar.
Or a billion dollar valuation ona PE side, if you bootstrap the
thing, or you're, you're like, Idon't see how this becomes a
billion dollar company.
This is a good, good business.
That's in a, that's got a goodniche.
(29:48):
That's going to really growthat, you know, could grow at
20, 30, 40 percent a year withsome capital and, and some
expertise.
That's a PE backed business.
Venture is not going to beinterested.
And you can burn a lot of time,energy, and effort trying to
chase the wrong money.
squadcaster-jidf_1_12-17- (30:02):
Yeah, we're chasing any money to be
honest.
So, I mean, I'd say the other, Ithought we were going to go
here.
I agree with what you said, butI would also say the other right
answer is bootstrap it all theway.
Don't take on extra money.
Don't take on outside money.
If you can, if you can get it tothe point where you don't need
that, like, you know, operatingcash flow or should say, you
(30:23):
know, outside investment just tokeep the lights on and you can
bootstrap it to the point of,you know, You know, PE level,
uh, growth capital, do that.
Don't mess around in the middle.
Like, if you can bootstrap it,bootstrap it.
You know, it's going to be bestfor your outcome.
You're going to retain thecompany much longer and have a,
have much more leverage and haveto give up as much along the
(30:45):
way.
emily-sander_1_12-17-2024 (30:47):
Okay.
If someone is entertaining VC orPE money, what are some things
they should look at to protectthemselves in terms of like, I
don't want to get diluted or Idon't want someone to put one
past me where they give me likethis template.
I don't understand.
So I sign it.
What are some key things theyshould look for?
squadcaster-jidf_1_12-17- (31:03):
going back to, uh, I believe a couple
episodes ago, we said, get yourteam around you.
know, you be, you want to beworking with good lawyers, good
advisors, You know to help youalong the way if you try to you
know, if you're if you're ifyou're not experienced in these
things you will get taken to thecleaners.
Um, so make sure you've got goodrepresentation you cut a deal.
(31:27):
I mean, that's the first, firstorder of business.
ed-barton_1_12-17-2024_16 (31:30):
Yeah, there's, and there's a couple,
couple other things even beforeor in parallel to putting that
team around you.
Um, the first one is talk tosome folks who have been there,
done
squadcaster-jidf_1_12-17- (31:41):
Yeah.
ed-barton_1_12-17-2024_160 (31:42):
from the founder seat.
So there's, you know, different,different, especially in areas
like Seattle here where you'vegot a lot of founder, founder
built businesses and folks whohave gone through this exercise
and succeeded and failed.
You've got resources to be ableto kind of sit down and hear the
stories.
I mean, you're hearing ourstories and we've been through
it.
There's here in, you know, ifyou just think about Seattle
(32:02):
alone, there's probably 5, 000other people
squadcaster-jidf_1_12-17- (32:04):
Yeah.
ed-barton_1_12-17-2024_1605 (32:05):
sit down and have similar
conversations.
Pick those brains.
The other is there's a lot of,you know, kind of shameless plug
for the book, but there's a lotof books out there that, you
know, talk about private equity.
You know, we not a lot onprivate equity, which is why,
you know, we're, we're so goodat helping people, but there's,
you know, private equity and alot of startup.
(32:27):
Um, you know, how to fund yourstartup and, you know, some of
the private, the, the privatemoney and how to raise seed
rounds, they're not going to getyou from here to there.
And there's no replacement forhaving the right resources
around you, but they will giveyou an idea of the environment,
the type of questions to ask,and kind of a, at least a
framework from which to be ableto operate.
(32:48):
And so I,
squadcaster-jidf_1_12-17- (32:49):
Yeah.
ed-barton_1_12-17-20 (32:50):
Recommend, I'd recommend that in parallel
with trying to determine whoyour advisors are and make sure
you get a good team around you.
emily-sander_1_12-17-2024_1 (32:59):
all right.
So assemble your team, get yourresources going.
There's places like startupgrind in Seattle.
That's literally for founders,uh, doing the startup thing and
they have tremendous resourcesthere.
There's platforms like YCombinator where you can get
connected with the people youneed to, uh, podcast wise,
you're in the right place.
So great job.
And then book reading wise,there are.
(33:20):
Dozens, probably hundreds.
But the one you want to startwith is on ramp to exit.
And we'll have a link for thatin the show notes it's available
on Amazon and anywhere books aresold.
And we will catch you next timeon the private equity experience
podcast.
Thanks guys.
squadcaster-jidf_1_12-17- (33:34):
Thank you.
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