4 Things Every Founder Should Know Before Choosing a Private Equity Partner

We quickly learned that a lot of private equity firms sounded the same, telling us they understand founders, know our sector and can help us grow. What do those promises mean once the transaction is complete?

We had known each other for about 25 years before building TruTechnologies. Rick had spent his career in drug development, while Scott had built and exited a technology company. In 2018, a conversation about the surprisingly manual processes still used in clinical trials led us to an opportunity neither of us could ignore. We then spent two years validating the problem. After six years of building, from bootstrapping the business to achieving profitability and seeing several years of revenue growth, we saw a large market opportunity that we wanted to invest more aggressively against. That kicked off a formal process with potential potential private equity partners.

We quickly learned that a lot of private equity firms sounded the same, telling us they understand founders, know our sector and can help us grow. But what do those promises mean once the transaction is complete? In the process, we learned how to ask the questions (and listen for the answers) that helped us identify a private equity firm that could help us realize our revenue goals and respect our vision throughout the partnership.

In this GrowthBit, we share four things we did that we felt helped us find a partnership that worked.

The ability to listen, absorb the information and ask better questions in the next conversation can save you and your team time while also telling you a lot about how that person will operate as a partner.

1. Pay attention to the questions investors ask and the information they retain

Nearly every investor talks about sector expertise. Founders should look for evidence of it, and one of the best ways to do it is surprisingly simple: pay attention to the questions investors ask you.

These questions will reveal how deeply potential partners understand what you do and what’s happening in your industry. Even more revealing is whether they listen. When you’re having conversations with a lot of different potential partners, you don’t have time to keep repeating the same things. The investors who listen, retain what you tell them and build on it will help make the process much more efficient. The ability to listen, absorb the information and ask better questions in the next conversation can save you and your team time while also telling you a lot about how that person will operate as a partner.

2. Know who you’ll actually be working with after the deal closes

Don’t evaluate the firm. Evaluate the people. Spend as much time as possible with the individuals who will be involved in your company after the transaction. Find out who will sit on your board, who you’ll interact with regularly and whether the people courting you during the process will still be there after the deal closes.

Pay attention to the informal interactions, too. Can you have a candid conversation? Do you enjoy being around them? How do they respond when you disagree? Culture isn’t just something an investor should evaluate in your company. You should be evaluating theirs, too. If you’re going through this for the first time, it can be easy to underestimate how important this is, but ultimately, it’s about who you work with.

The question isn’t whether an investor’s culture is objectively “good” or “bad.” It’s whether your working styles and values are compatible enough to build a productive relationship.

3. Make sure potential partners understand what makes your culture special

Founders spend years building a company, and culture becomes deeply intertwined with how it operates. We were proud of the culture we had built at TruTechnologies and how it reflected how we wanted to work together as a team. We believe work should be demanding and move with urgency, but we also believe people should enjoy doing it. That is part of how we operate.

Ask prospective partners what they see when they look beyond the financials. What do they believe makes the company successful? What aspects of the culture do they value? What would they want to preserve as the business grows?

Then pay attention to whether their actions during diligence support their answers. For founders, the question isn’t whether an investor’s culture is objectively “good” or “bad.” It’s whether your working styles and values are compatible enough to build a productive relationship.

Talk through what your roles will entail in real terms; what that actually means on a Tuesday morning six months after closing?

4. Get the details about how the relationship works

Before signing, get specific about how management, the board and the operating and value creation teams will work together. What are the roles, responsibilities and decision rights? What decisions will management continue to own? Where does the board expect to be involved? How frequently will you interact? When you disagree, how will you resolve it? How do those operating or value creation resources work? Who decides what support is needed? What does the interaction look like with the management team? Talk through what those founder roles will entail in real terms; what that actually means on a Tuesday morning six months after closing?

There is no universally correct operating model. What matters is that both sides understand the model they’re signing up for before they start working within it.

Here’s the bottom line.

A diligence process is designed for an investor to learn everything it can about your company. As a founder, use that same opportunity to conduct your own diligence on them. Ask questions. Evaluate the answers. Evaluate how well they listen to those answers. Pay attention to how they show up throughout the process. The better you understand the people behind the firm and how the relationship will actually work before signing, the better equipped you’ll be to choose a partner who fits the company you’ve built and where you want to take it next.

For more on a CEO’s checklist for fund timing, board questions and reference calls, read our perspective on what makes a private equity partner right for you.