improving portfolio company valuations by working with operating executives

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© David Teten 2012. More at ffvc.com and teten.com © David Teten 2012. More at ffvc.com and teten.com How Private Equity and VC Funds Find New Deals and Improve Portfolio Company Valuations by Working with Entrepreneurs and Operating Executives http://flickr.com/photos/7438870@N04/1329749621/sizes/l/ David Teten Partner, ff Venture Capital ffvc.com teten.com @dteten New York, NY [email protected]

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Improving Portfolio Company Valuations by Working with Operating Executives How Private Equity/Venture Capital Funds can work with Expert Networks, Interim Executives, Senior Advisor Networks, Executives in Residence, Entrepreneurs in Residence, and Deal Executives Speaker: David Teten www.Teten.com

TRANSCRIPT

Page 1: Improving Portfolio Company Valuations by Working with Operating Executives

© David Teten 2012. More at ffvc.com and teten.com© David Teten 2012. More at ffvc.com and teten.com

How Private Equity and VC Funds Find New Deals and Improve Portfolio Company Valuations by Working with Entrepreneurs and Operating Executives

http://flickr.com/photos/7438870@N04/1329749621/sizes/l/

David TetenPartner, ff Venture Capitalffvc.comteten.com@dtetenNew York, [email protected]

Page 2: Improving Portfolio Company Valuations by Working with Operating Executives

© David Teten 2012. More at ffvc.com and teten.com© David Teten 2012. More at ffvc.com and teten.com

• Selected private equity and venture capital funds

• CEO Trust

• Executive Forum

• Harvard Business School Alumni Career Management Webinar Series

• Harvard Business School Club of Connecticut

• International Executives Resource Group

• Institute for International Research PE Operations conference

Selected Past Audiences for this Presentation

Page 3: Improving Portfolio Company Valuations by Working with Operating Executives

Intro Advisor Social Next StepsExpert Deal Exec

© David Teten 2012. More at ffvc.com and teten.com

• Introduction

• Expert Networks and Interim Executives

• Senior Advisor Networks, Executives in Residence, and Entrepreneurs in Residence

• Deal Executives

• Social Media

• Next Steps

Agenda

Page 4: Improving Portfolio Company Valuations by Working with Operating Executives

Intro Advisor Social Next StepsExpert Deal Exec

© David Teten 2012. More at ffvc.com and teten.com

Background

David Teten is currently leading the first-ever research study on “Best Practices of Venture Capitalists in Increasing Portfolio Company Value through Operational Improvement”. In 2010, he completed the first-ever research project on “Best Practices in Private Equity and Venture Capital Deal Origination”. His coauthor for the deal origination research was Chris Farmer, Venture Partner, General Catalyst. These slides provide some of the learnings and underlying data from the research studies.

David and Chris have published their findings in the Journal of Private Equity (Winter 2010); Mergers & Acquisitions (December 2010); Institutional Investor (October 2010); and Harvard Business Review (June 2010), among other venues.

Evalueserve, a global research firm and the acquirer of David’s former company (Circle of Experts), provided supporting research and analytics in the initial phases of the deal origination study. For this research, we also thank research associates Yujin Chung (Andreessen Horowitz) and Neha Kumar (Anklesaria Group), and interns Corentin Roux dit Buisson, Dan Clark, Nitin Gupta, and Nikhil Iyer .

Page 5: Improving Portfolio Company Valuations by Working with Operating Executives

Intro Advisor Social Next StepsExpert Deal Exec

© David Teten 2012. More at ffvc.com and teten.com

• Partner, ff Venture Capital, early-stage technology venture capital fund. Over 100 investments in over 45 companies since 1999.

• Founder and Chairman, Harvard Business School Angels of New York• Founder and Chairman, Navon Partners, startup focused on sourcing deals for private

equity funds• Managing Director, Evalueserve, through September 2008. 2,500-person finance-focused

research and analytics firm. • Founder and CEO, Circle of Experts (investment research firm), sold to Evalueserve• Founder and CEO, Teten Executive Recruiting, sold to Accolo, #42 on 2007 Inc. 500• Founder and CEO, GoldNames, domain name investment bank, based in Israel• Technology/Defense Investment Banking, Bear Stearns (#1 group at Bear investment

banking by revenues) • Lead author, The Virtual Handshake: Opening Doors and

Closing Deals Online (TheVirtualHandshake.com)• Harvard MBA 1998, Yale BA, both with honors.• Contact: [email protected]

David Teten Biography

Page 6: Improving Portfolio Company Valuations by Working with Operating Executives

Intro Advisor Social Next StepsExpert Deal Exec

© David Teten 2012. More at ffvc.com and teten.com

Partner, ff Venture Capital (ffvc.com)• Early-stage technology venture capital fund• Founded 1999, with over 100 investments in over 45 companies• Focus on early stage web-based services companies with disruptive models,

including SaaS, video gaming, digital media, social, mobile and VoIP• First investments typically $50-$250K at valuations of <$5m pre-money• 50% of fund reserved for follow-on investments• Prominent angel investments include:

Cornerstone OnDemand (IPO); Quigo Technologies (sold to AOL for reported $340m); Klout; Hashable; 500px; BetterWorks

Page 7: Improving Portfolio Company Valuations by Working with Operating Executives

Intro Advisor Social Next StepsExpert Deal Exec

© David Teten 2012. More at ffvc.com and teten.com

Fund

Com

mitm

ent

Free Agent expenses+upside

Rejected Executives

Senior Advisor / Deal Executiveexpenses+upside

Executive/Entrepreneur in Residence retainer+upside

Portfolio Company / NewCo Management salary+upside

Executive’s Income

Expert Network / Interim Executivehourly comp

Operating Partner / Venture Partnersalary+carry

PE Fund Structural Options in Working with Operating Executives

Private equity funds have a wide range of options in working with executives and entrepreneurs.

Page 8: Improving Portfolio Company Valuations by Working with Operating Executives

Intro Advisor Social Next StepsExpert Deal Exec

© David Teten 2012. More at ffvc.com and teten.com

Selected Searchable Databases of PE/VC Funds

You can identify institutional investors through one of multiple online databases.

All Investors Private Equity Venture Capital

• Galantes

• Grey House

• VentureXpert

• Pitchbook

• PrivateEquityFirms.com

• Eurekahedge

• Asia PE Research

• AngelList

• Gust

• CrunchBase

• PWC MoneyTree

• TheFunded

• VentureDeal

• Asian Venture Capital

Journal

Page 9: Improving Portfolio Company Valuations by Working with Operating Executives

Intro Advisor Social Next StepsExpert Deal Exec

© David Teten 2012. More at ffvc.com and teten.com

Source of Gains in Private Equity-Backed Companies

Ernst & Young 2006 study of 100 exits

Operational improvement drives 71% of value creation in PE-backed companies.

Page 10: Improving Portfolio Company Valuations by Working with Operating Executives

Intro Advisor Social Next StepsExpert Deal Exec

© David Teten 2012. More at ffvc.com and teten.com

• Global economic crisisMost portfolio companies require operating changes to survive

• Investors seek differentiationBain: “as much as 80% of PE returns will come from real performance improvement, rather than … financial structuring.”*

• Maturing Private Equity Industry Larger size and greater complexity leads to greater role specialization

• Risk MitigationOperational perspective add counter-balance to deal team

• Strategy DrivenDeep value investing, turnarounds, mid-market focus, and industry- specialized funds require hands-on approach.

based on Jon Weber, Anchorage Advisors LLC* http://www.bain.com/bainweb/publications/publications_detail.asp?id=10735&menu_url=publications_results.asp

Operational improvement is particularly important now because of the economic landscape and the maturation of the PE industry.

Page 11: Improving Portfolio Company Valuations by Working with Operating Executives

Intro Advisor Social Next StepsExpert Deal Exec

© David Teten 2012. More at ffvc.com and teten.com Matthew Kissner, Kissner Group

Management Environment Before and After PE Investment

PE funds almost always require an upgrade in management, and change management teams if necessary.

Before Investment After InvestmentReporting Independent Have a “boss”

Style Loose, entrepreneurial Financial discipline

Decision making Just do it Board approval

Determining success Divide up the cash at the end of the year

Monthly financials, annual bonuses

Spending Invest as needed Must be justified

Page 12: Improving Portfolio Company Valuations by Working with Operating Executives

Intro Advisor Social Next StepsExpert Deal Exec

© David Teten 2012. More at ffvc.com and teten.com Matthew Kissner, Kissner Group

Growth Capacity Before and After PE Investment

PE funds require a company to lay capacity for organic and, often, acquisition-led growth.

Success Factors when Small Success Factors for GrowthLean senior executive team Complete senior and mid-

management teamInformal small group dynamics Formal roles, responsibilities, and

systemsAd hoc IT projects – reactive Flexible and scalable IT Cash basis financial systems Strong monthly financial and

operational reportingAll business is good business Customer segmentationLimited prioritization Strategic plan drives priorities

Page 13: Improving Portfolio Company Valuations by Working with Operating Executives

Intro Advisor Social Next StepsExpert Deal Exec

© David Teten 2012. More at ffvc.com and teten.com

• Introduction

• Expert Networks and Interim Executives

• Senior Advisor Networks, Executives in Residence, and Entrepreneurs in Residence

• Deal Executives

• Social Media

• Next Steps

Agenda

Page 14: Improving Portfolio Company Valuations by Working with Operating Executives

Intro Advisor Social Next StepsExpert Deal Exec

© David Teten 2012. More at ffvc.com and teten.com

Expert Network Access Model

InvestorInvestor BuyersBuyers

AcademicsAcademics

SupplierSupplier

GovernmentGovernment

New EntrantsNew Entrants

CompetitorCompetitorCorporate Alumni

Corporate Alumni

based on Competitive Strategy: Techniques for Analyzing Industries and Competitors, Michael Porter.

ManagementManagement

Expert networks provide investors access to experts from all of the forces that impact a company.

Page 15: Improving Portfolio Company Valuations by Working with Operating Executives

Intro Advisor Social Next StepsExpert Deal Exec

© David Teten 2012. More at ffvc.com and teten.com

Generalists• Advantus Global (formerly Evalueserve

Circle of Experts) • Gerson Lehrman Group• Coleman Research Group• DeMatteo Monness LLC• Guidepoint Global

Specialty/Other Players• Intota• Kingfish Group• Maven Research• Primary Insight

Selected Leading Expert Networks

The expert network industry is the fastest-growing sector of the investment research sector, with aggregate revenues over $300m.

Medical• MEDACorp (Leerink Swaan)• Sermo

Page 16: Improving Portfolio Company Valuations by Working with Operating Executives

Intro Advisor Social Next StepsExpert Deal Exec

© David Teten 2012. More at ffvc.com and teten.com

USA-focused• Business Talent Group• Highpoint Associates• Point B• 10EQS

Europe-focused• a-connect• Eden McCallum

http://www.flickr.com/photos/opendemocracy/1441901063/

Selected Consultant Networks

Networks of independent consultants have emerged as a new niche, typically engaging in projects of 2-6 months duration.

Page 17: Improving Portfolio Company Valuations by Working with Operating Executives

Intro Advisor Social Next StepsExpert Deal Exec

© David Teten 2012. More at ffvc.com and teten.com

Selected Interim Executive ProvidersUSA• Business Talent Group• Epoch• Executive Smarts• ForteCEO• Heidrick & Struggles Chief Advisor

Network• Interim America• OnDemand Resources• OneAccord• Tatum Executive Services• Willmark Associates

Europe• Alium Partners• BIE• Brooklands Executives• EIM (Executive Interim

Management)• Impact Executives• Marble Hill Partners

http://www.flickr.com/photos/opendemocracy/1441901063/

The interim executive industry is much better developed in Europe than in the US.

Page 18: Improving Portfolio Company Valuations by Working with Operating Executives

Intro Advisor Social Next StepsExpert Deal Exec

© David Teten 2012. More at ffvc.com and teten.com

• Interact with professional investors and corporations• Strategic, thought-provoking projects• Competitive compensation • Receive fees to introduce colleaguesand the big NO’s:• No membership cost• No marketing cost • No time spent on negotiating or chasing

payment

Benefits To Executive of Participating in Expert Network

http://flickr.com/photos/foundphotoslj/1134148114/

Expert networks are highly attractive to participants, whether working full-time, consultants, or in transition.

Page 19: Improving Portfolio Company Valuations by Working with Operating Executives

Intro Advisor Social Next StepsExpert Deal Exec

© David Teten 2012. More at ffvc.com and teten.com

• Phone calls

• Presentations

• Surveys

• White papers

• Longer consulting projects

http://farm2.static.flickr.com/1318/1134149284_85feb293d3.jpg?v=0

Expert networks engage with experts in a range of ways, but telephone calls are the primary method.

Page 20: Improving Portfolio Company Valuations by Working with Operating Executives

Intro Advisor Social Next StepsExpert Deal Exec

© David Teten 2012. More at ffvc.com and teten.com

• Accept/Reject request within 48 hours

• Consultation strictly between expert and client

• No fixed obligation

http://farm4.static.flickr.com/3274/2866399803_8c9493b42f_o.jpg

Expert networks are designed to require an extremely low level of commitment from experts.

Page 21: Improving Portfolio Company Valuations by Working with Operating Executives

Intro Advisor Social Next StepsExpert Deal Exec

© David Teten 2012. More at ffvc.com and teten.com

Experience• Industry Recognition• Academic credentials

Access to unique knowledge• Affiliations

Communication skills

Irrelevant: social skills, management skillshttp://www.flickr.com/photos/kanzeon_zen_center/183801709/

Expert Network Selection Criteria

Expert networks assess experts based on their knowledge and ability to share it.

Page 22: Improving Portfolio Company Valuations by Working with Operating Executives

Intro Advisor Social Next StepsExpert Deal Exec

© David Teten 2012. More at ffvc.com and teten.com

• Update your availability and bio• Quantify achievements• Explain how you acquired your

expertise• Insert specific keywords

• Identify firms you touched• Focus on industry-specific

knowledge• Update your bio and profile questions

again based on consults you get

The #1 driver of your participation in expert networks is the quality of data in your online profile.

http://www.flickr.com/photos/edenpictures/3460562429/sizes/z/in/photostream/

Page 23: Improving Portfolio Company Valuations by Working with Operating Executives

Intro Advisor Social Next StepsExpert Deal Exec

© David Teten 2012. More at ffvc.com and teten.com

1. Ask

2. Mail your liaison when you have insight into a hot topic

3. Apply for open projects

4. Go on-call

5. Contribute to Expert Network

news service (e.g., Gerson

Lehrman Group News)

http://www.flickr.com/photos/sarahquinn/124454341/

Successful consultations lead to more consultations. In addition, experts can increase consulting volume through 4 methods:

Page 24: Improving Portfolio Company Valuations by Working with Operating Executives

Intro Advisor Social Next StepsExpert Deal Exec

© David Teten 2012. More at ffvc.com and teten.com

• Observe compliance restrictions• Review current news• Ask client’s level of background—do they want an introduction or to jump

straight into very specific topics?• Ask questions to understand

the client’s hot buttons• Make sure to answer

client’s key questions• Acknowledge your limits• Offer referrals

http://upload.wikimedia.org/wikipedia/commons/3/3b/Old_key_on_table.jpg

Thorough preparation for a consultation enhances your client ratings.

Page 25: Improving Portfolio Company Valuations by Working with Operating Executives

Intro Advisor Social Next StepsExpert Deal Exec

© David Teten 2012. More at ffvc.com and teten.com

• Register at expert network and interim executive web sites

(and LinkedIn, job boards, etc.)

• Biography

• Hourly billing rate

• Resume

• Consider becoming a public

expert: PRNewsWire ProfNet,

HelpaReporter.com

http://www.flickr.com/photos/twodolla/1764565402/

Next Steps to Becoming an Active Expert Network Member…

Page 26: Improving Portfolio Company Valuations by Working with Operating Executives

Intro Advisor Social Next StepsExpert Deal Exec

© David Teten 2012. More at ffvc.com and teten.com

Agenda

• Introduction

• Expert Networks and Interim Executives

• Senior Advisor Networks, Executives in Residence, and Entrepreneurs in Residence

• Deal Executives

• Social Media

• Next Steps

Page 27: Improving Portfolio Company Valuations by Working with Operating Executives

Intro Advisor Social Next StepsExpert Deal Exec

© David Teten 2012. More at ffvc.com and teten.com

“Senior advisor network” or “Executive network” = investor- sponsored group of executives with ability and willingness to add value to portfolio companies

Industry Expert

Industry Expert

Deal SourceDeal Source

Interim CFOInterim CFOInvestorInvestor

Portfolio Company “C”

Portfolio Company “C”

Portfolio Company “B”

Portfolio Company “B”

Portfolio Company “A”

Portfolio Company “A”

Board Member Board

Member

based on Jon Weber, Anchorage Advisors LLC

Definition

Page 28: Improving Portfolio Company Valuations by Working with Operating Executives

Intro Advisor Social Next StepsExpert Deal Exec

© David Teten 2012. More at ffvc.com and teten.com based on table from Jon Weber, Anchorage Advisors LLC

Senior Advisor Network vs. Traditional Talent Sources

Senior Advisor networks offer a low-fixed-cost, high-return talent pool option.

Experts and Consultants Senior Advisor Network Executive RecruitmentRelationship Owner

Expert network / consultancy Fund Recruiting firm, then handed over to fund

Duration 1–2 hours to 3 months 6 months–2 years+ Permanent job and board positions

Sample Service Providers

Gerson Lehrman, McKinsey, Evalueserve

Navon Partners, Notch Partners

Heidrick & Struggles, Russell Reynolds, Ignition Search Partners

Illustrative Cost $1,000/hr for expert networks $300–700/hr for consultants

Sometimes retainer, sometimes paid like investment banker

1/3 compensation

Driver of Exec Compensation

Length of consultation Value creation and continued involvement with client companies

Winning full-time employment

Confidentiality NDA possibly. Consultant may “shop” ideas.

Signed, enforceable NDA NDA unusual

Page 29: Improving Portfolio Company Valuations by Working with Operating Executives

Intro Advisor Social Next StepsExpert Deal Exec

© David Teten 2012. More at ffvc.com and teten.com

Selected Funds with Senior Advisor Networks

Many leading PE and VC funds have built Senior Advisor Networks.

Private Equity Venture Capital• 3i • Castle Harlan • Cerberus • Irving Place Capital • General Atlantic • Goldman Sachs Special Situations

Group • Sun Capital • Welsh, Carson, Anderson & Stowe

• ff Venture Capital• Great Oaks Venture Capital• 500 Startups

Page 30: Improving Portfolio Company Valuations by Working with Operating Executives

Intro Advisor Social Next StepsExpert Deal Exec

© David Teten 2012. More at ffvc.com and teten.com http://farm1.static.flickr.com/7/8228640_921246eaa3.jpg?v=0

• Abernathy Group “Collaborative Investing”

• Castle Harlan

• Frontenac

• Institutional Venture

Partners Founders Fund

• Irving Place Capital

(formerly BSMB)

Selected PE Funds with Executive Funds

Some PE funds offer favorable economic terms for executives who are “friends of the firm”.

Page 31: Improving Portfolio Company Valuations by Working with Operating Executives

Intro Advisor Social Next StepsExpert Deal Exec

© David Teten 2012. More at ffvc.com and teten.com

Agenda

• Introduction

• Expert Networks and Interim Executives

• Senior Advisor Networks, Executives in Residence, and Entrepreneurs in Residence

• Deal Executives

• Social Media

• Next Steps

Page 32: Improving Portfolio Company Valuations by Working with Operating Executives

Intro Advisor Social Next StepsExpert Deal Exec

© David Teten 2012. More at ffvc.com and teten.com

How Private Equity Views Executives

Job SeekerDeal Resource

Thesis-DrivenDeal Exec

Deal Exec with Letter of Intent

Target-Driven Deal Exec

http://www.flickr.com/photos/chailey/138654755/ . Inspired by Notch Partners.

PE funds are primarily looking for deals, not executives.

Page 33: Improving Portfolio Company Valuations by Working with Operating Executives

Intro Advisor Social Next StepsExpert Deal Exec

© David Teten 2012. More at ffvc.com and teten.com

• CEO-level leader or direct report to C-level

• 10+ years in industry/related market. 10+ years leading P&L

and preferably also balance sheet experience.

• Clear value creation plan. Understanding of private equity.

• Personal capital to invest

• Ideally: ready management team;

corporate governance skills (board

experience), investor relations experiencehttp://www.flickr.com/photos/ilker/2494740320/

Deal Executive Preferred Profile: Credibility

Page 34: Improving Portfolio Company Valuations by Working with Operating Executives

Intro Advisor Social Next StepsExpert Deal Exec

© David Teten 2012. More at ffvc.com and teten.com

• Compatible goals

• Aligned incentives

• Personal chemistry

http://www.flickr.com/photos/superrabbit/319538167/

Deal Executive Preferred Profile: Compatibility

Page 35: Improving Portfolio Company Valuations by Working with Operating Executives

Intro Advisor Social Next StepsExpert Deal Exec

© David Teten 2012. More at ffvc.com and teten.com

• Proactively seeking to identify deals.

• Preferably, has proprietary deal(s)

• Financially stable to go without salary during search

• Spousal support

• 100% committed to a risky process not

fully in your control

• Entrepreneurial and sales oriented

• Can relocate

• Prefer: acquisition experience.

http://flickr.com/photos/krikit/2745563123/sizes/o/

Deal Executive Preferred Profile: Deal-Catcher

Page 36: Improving Portfolio Company Valuations by Working with Operating Executives

Intro Advisor Social Next StepsExpert Deal Exec

© David Teten 2012. More at ffvc.com and teten.com http://www.flickr.com/photos/bfurlong/2351689062/ . Based on Notch Partners and many other sources.

• Clear definition of industry – niche, size, geography, etc.• Transaction rationale consistent with company’s growth prospects• Basic financial markets analysis: trading range, feasibility• Outline of value-creation opportunities• Plan for pursuing those sources of value• Explanation of why you/ your team are ideally suited to lead effort • Roster of 5-20 target companies• Status of discussions with targets

(if any)• Thoughts on likely exit (IPO, strategic

buyer)

Elements of a Deal Thesis

Page 37: Improving Portfolio Company Valuations by Working with Operating Executives

Intro Advisor Social Next StepsExpert Deal Exec

© David Teten 2012. More at ffvc.com and teten.com

• Review industry for feasibility:• Market trends (opportunistic

research analysis)• Valuation analysis• Capital-intensity requirements• Fragmentation analysis

• Profile executive to assess candidacy• Source companies• Source sponsors

http://www.flickr.com/photos/pfala/3036252334/

Navon Partners works with executives throughout the process to help execute a transaction.

Page 38: Improving Portfolio Company Valuations by Working with Operating Executives

Intro Advisor Social Next StepsExpert Deal Exec

© David Teten 2012. More at ffvc.com and teten.com

1) Find the company and get close to signing a Letter of Intent, and then pursue sponsor

2) Find sponsor and then search for company.• Executive + Navon Partners screens

for funds with track record of pursuing executive-led transactions and interest in industry

• More important to use this strategy with larger deals

http://www.flickr.com/photos/thalamus/3560789785/

An executive has two main paths to choose from in pursuing a transaction:

Page 39: Improving Portfolio Company Valuations by Working with Operating Executives

Intro Advisor Social Next StepsExpert Deal Exec

© David Teten 2012. More at ffvc.com and teten.com

• Secrecy• Continuity• Speed• Lower investment banking fees• “Dummy insurance”: easier to keep a stake in the spunoff

company• Trust/proven competency• Relationship with the Board of Directors

Rick Rickertson, Buyout: The Insider’s Guide to Buying Your Own Company, 49-50.

Primary Reasons Some Companies Prefer Selling to Management

Many companies prefer to sell to management, even at risk of a lower price than they might get from an auction.

Page 40: Improving Portfolio Company Valuations by Working with Operating Executives

Intro Advisor Social Next StepsExpert Deal Exec

© David Teten 2012. More at ffvc.com and teten.com

• Teaser • Business plan• Executive profile• Forecasts

• Strategic• Operational• Financial

http://www.flickr.com/photos/11846056@N06/3110329005/

Elements of a Deal Memo

Page 41: Improving Portfolio Company Valuations by Working with Operating Executives

Intro Advisor Social Next StepsExpert Deal Exec

© David Teten 2012. More at ffvc.com and teten.com Based on Post Capital, http://www.defenselink.mil/dodcmsshare/newsphoto/2008-03/hires_080301-F-2319R-006.jpg

• Introduction

• Initial meetings

• Assessment of investment thesis

Duration: 2-4 weeks

Step 1 of 5: Launch Relationship with Fund

Page 42: Improving Portfolio Company Valuations by Working with Operating Executives

Intro Advisor Social Next StepsExpert Deal Exec

© David Teten 2012. More at ffvc.com and teten.com Based on Post Capital, picasaweb.google.com/lh/photo/FOHUbVdTEYKdftpmi6TkXQ

• Refine thesis

• Agree on compensation/economics

and exclusivity

• Background check

• Formulate deal origination plan

Step 2 of 5: Finalize partnership between executive and fund

Duration: 1-4 weeks

Page 43: Improving Portfolio Company Valuations by Working with Operating Executives

Intro Advisor Social Next StepsExpert Deal Exec

© David Teten 2012. More at ffvc.com and teten.com Based on Mario Kyd, Unlimited Horizons; http://www.flickr.com/photos/carve/2856365431/

• Inefficiencies within a market segment or industry• Ineffective processes• Outdated business models• Competition from low cost countries• Novel product, process or idea• Rollup of fragmented industry• Industry changes (read the trade rags)

Concept-Driven Approach (e.g., with investment banker)

Step 3 of 5: Identify/Contact Opportunities

Duration: 1-12 months

Page 44: Improving Portfolio Company Valuations by Working with Operating Executives

Intro Advisor Social Next StepsExpert Deal Exec

© David Teten 2012. More at ffvc.com and teten.com Based on Mario Kyd, Unlimited Horizons; http://www.flickr.com/photos/jurvetson/3346659199/

• Former employers, suppliers,

customers, competitors

• Investment bankers, brokers,

accountants, lawyers

• Attend conferences

• Look for reasons why people sell

Opportunistic Approach (Network), led by Executive

Step 3 of 5: Identify/Contact Opportunities (cont’d)

Duration: 1-12 months

Page 45: Improving Portfolio Company Valuations by Working with Operating Executives

Intro Advisor Social Next StepsExpert Deal Exec

© David Teten 2012. More at ffvc.com and teten.com based on Post Capital; Lapis Group; numerous other sources. http://www.flickr.com/photos/matt_gibson/954340171/

• Company meetings• Negotiate• Due Diligence

• Can a deal be made?• Can we interest investors?• Can you “drive” the deal?

Step 4 of 5: Evaluate Targets

Duration: up to 3 months

Page 46: Improving Portfolio Company Valuations by Working with Operating Executives

Intro Advisor Social Next StepsExpert Deal Exec

© David Teten 2012. More at ffvc.com and teten.com Based on Post Capital upload.wikimedia.org/wikipedia/commons/4/47/Tower_Bridge_closing.jpg

• Finalize documentation

• Finalize financing

Step 5 of 5: Closing

Duration: up to 3 months

Page 47: Improving Portfolio Company Valuations by Working with Operating Executives

Intro Advisor Social Next StepsExpert Deal Exec

© David Teten 2012. More at ffvc.com and teten.com

This does not reflect compensation for an executive’s role as a company employee post-deal. Note that transaction fee and carry are inversely related. * Robert Seber, Dechert LLP, “Transaction and Monitoring Fees: Does Anything Go?”, 2003.

** The PEG’s fund documents will generally discuss whether a portion of that fee (often half) is set off against management fees that the LP’s would otherwise owe.Other data based on Akoya Capital, Oberon Securities, and other interviewees.

Typical Economics for Mid-Market Private Equity Acquisition, for PEG, Deal Finders, Investment Bankers, and other ExecutivesFee Type This entity Pays to PEG Other partiesTransaction Fees

Capital providers

0.5-3.4% deal size*

PEG pays finder’s fee of 1-3% of enterprise value to deal finder + buy-side investment bank (if any).Company (specifically selling shareholders) pay investment banker seller’s fee.

Monitoring Fees

Company 0.2%-4.4% EBITDA (median 1.2%)*,**

Company pays outside board members for ongoing services (~$5K+/meeting + equity incentives)

Expenses Company Post-deal expenses, not pre-deal

Important for buy-side operating exec/investment banker to get PEG to commit to pay broken deal costs.

Carry Limited Partners

~1% assets + ~20% carry

Company may pay deal finder some carry, typically 2-8%, on total capital invested by fund. May require passing a performance mark.

Investment rights

- - Usually unlimited co-invest rights for executives involved, with no PEG management fee. Executives will, however, pay pro rata monitoring/other fees.

Page 48: Improving Portfolio Company Valuations by Working with Operating Executives

Intro Advisor Social Next StepsExpert Deal Exec

© David Teten 2012. More at ffvc.com and teten.com

Agenda

• Introduction

• Expert Networks and Interim Executives

• Senior Advisor Networks, Executives in Residence, and Entrepreneurs in Residence

• Deal Executives

• Social Media

• Next Steps

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Intro Advisor Social Next StepsExpert Deal Exec

© David Teten 2012. More at ffvc.com and teten.com

Biography analysis software allows searches by common affinity and more effective subsequent outreach.

• Boardex• Jigsaw• Pipl• Honestly• ZoomInfo

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Intro Advisor Social Next StepsExpert Deal Exec

© David Teten 2012. More at ffvc.com and teten.com

Private Equity News• Dealbook.blogs.nytimes.com• PEHub.com• PENews.com• PrivateEquityInfo.com

Venture Capital News• Mercurynews.com/vc• Techcrunch.com• Mashable.com

PE / VC News

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Intro Advisor Social Next StepsExpert Deal Exec

© David Teten 2012. More at ffvc.com and teten.com

Private Equity Focus

• ACG.org

• Angelsoft.net

• Finemrespice.com/subrosa

• Village.Albourne.com

Public Markets Focus

• FTAlphaville.FT.com/longroom

• SumZero.com

• ValueInvestorsClub.com

• Village.Albourne.com

Sample Gated Communities for Investors

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© David Teten 2012. More at ffvc.com and teten.com

Agenda

• Introduction

• Expert Networks and Interim Executives

• Senior Advisor Networks, Executives in Residence, and Entrepreneurs in Residence

• Deal Executives

• Social Media

• Next Steps

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© David Teten 2012. More at ffvc.com and teten.com

• The Virtual Handshake: Opening Doors and Closing Deals Online, David Teten and Scott Allen

• Buyout: The Insider’s Guide to Buying Your Own Company, Rick Rickertson

• goodreads.com/teten

Suggested Reading

Page 54: Improving Portfolio Company Valuations by Working with Operating Executives

Next StepsIntro AdvisorExpert Deal Exec Social

© David Teten 2012. More at ffvc.com and teten.com

Any questions ?

Slides at teten.com/operating-executives

More resources at ffvc.com and teten.com