Corporate & Business Transactions Tips for Startups

By Bryan Wasser


When venture capital (“VC”) firms or private equity (“PE”) firms invest in start-up companies their goal is to work with management to strengthen operations, accelerate growth, enhance profitability and position each portfolio company to become a market leader.  One of the most important advantages of a company being owned (or minority or majority-controlled) by such a VC or PE firm (referred to as a “portfolio company”) is the strength and focus of the directors of the portfolio company that are appointed by the VC or PE firm. However, senior management must stay focused as the day-to-day decisions will rest solely with them. To help senior management, we have put together the following set of principles that start-up companies can utilize to forge the strongest possible partnership between their management and the VC and PE firms that they partner with.

The most effective CEOs and CFOs are sophisticated communicators. They understand their role in managing the flow of information between the VC or PE firm and the other members of the management team. and can quickly communicate developments in the business to the VC or PE firm’s representatives. Investors expect their CEOs and CFOs to be straightforward and open about the challenges the portfolio company faces. what management is doing about those challenges and the likelihood of successful outcomes.

VC and PE firms strive to foster an action-oriented culture with a bias towards crisp decision making. They expect their CEOs and CFOs to be willing to do the work rather than just manage the work. To that end. they often work with management to develop a list of key performance indicators or metrics which give both management and the board a general sense of the company’s health. In fast-growing companies. the organizational structure often lags behind the rapid needs of the business. so senior executives have to be entrepreneurial and self-starting. In essence. they are looking for executives who will treat the money they invested as their own and drive results.

Because PE firms normally use leverage to acquire their portfolio companies. their portfolio companies tend to have higher levels of debt than when they were public or family-owned: therefore. management must pay constant attention to cash flow. spending levels. debt repayment and financial targets. “Cash is king” in portfolio companies. so finding new sources of revenue and controlling costs are top priorities. In practice. this means that management must be disciplined about financial concerns such as ensuring that capital spending proposals have a payback and improving receivables collection. A key player in this effort is the CFO. who typically has a commanding role in improving cash flow and driving value. The CFO role should be viewed as both consigliere and irritant to the CEO because the CFO is normally in the best position to challenge a CEO as to whether he or she can do more.

Given the fiduciary duties that VC and PE professionals owe their limited partners who invest in their funds. they frequently rely on a network of accountants. financial advisors and attorneys (e.g .. MSK) for advice. The CEOs and CFOs of their portfolio companies should do the same to ensure that decisions today will not negatively impact their future.

Portfolio company boards tend to be smaller and more hands-on than public company boards. VC and PE representatives meet frequently with management and can bring to bear the significant resources and contacts of their respective firms. VC and PE firms often bring outside directors to the table because they typically provide valuable operational. functional or industry expertise. and can serve as mentors or coaches to CEOs and CFOs. Working with a portfolio company board is comparable to having a board meeting that is almost constantly in session. As opposed to a few board meetings a year. a PC Board will normally have 10 or 14 very in-depth board meetings a year in which directors are reviewing in detail what’s going on in the business. The interaction between management and a PC Board is more intense. more frequent and more intimate than in other corporate ownership models. so senior management should learn and absorb as much knowledge and wisdom as possible to foster growth and success.

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