Private Company Investing – Our Best Practices…

By Brian V. Iversen, Founder and Managing Partner of Cimbria Capital and Noah Sabich, founding member and Managing Director of Cimbria Capital.

What does it mean to be a good investor and a successful manager of capital? How does one know ‘when and how’ to position capital with the best possible chance of creating positive financial returns? And what are the specific tools and disciplines that need to be used and followed to create above market and continual positive gains? In our view, answering these questions is more involved than what can be learned via conventional investment concepts dictated by investment structures and valuation theory.

The purpose of this post is to list and propose a few guidelines beyond conventional investment theory. Principles that will provide a deeper appreciation – and a recipe – for more sustainable levels of positive and above market financial returns.  These recommendations relate directly to our experience as private company investors and, although they are only a portion of the investment discipline applied in our firm’s process, they are likely the most critical. – Most importantly, these particular behaviors elevate our ability to make solid investment decisions, guide our portfolio companies towards projected outcomes, and offer financial returns expected by our investors.

1. Be a deal creator…

As a growth equity investor, one can set oneself apart by being able and willing to create investment opportunity rather than merely being a receiver and reviewer of investment opportunities generated by others. This approach requires harder work, more patience, and a willingness to ‘kiss even more frogs’ than the average private company investor. By spending time with companies and management teams that have not fully concluded on whether or not to pursue a capital raise, opportunity will arise from being the investor already at the table when this decision is made. This type of embeddedness is the truest form of proprietary deal flow. – And it will be available to us if we, as investors, are willing to spend time assisting growing companies with idea creation even before a capital raise has been contemplated. 

2) Business models, not just technologies and management teams…

It is said that the right people can take you anywhere. We are generally believers in this hypothesis, but it is rarely that simple. As private company investors, it is easy to be enamored by impressive management teams with strong track records or by potentially game-changing technologies. But if  management teams and technologies are not paired with the appropriate business models, the outcome is usually much less successful (or not successful at all). A great management team will, more often than not, fall short of success if pursuing the wrong business model. And promising technologies will be slowed to market or entirely disappear if not applied inside of an appropriate value proposition. Therefore, we propose to relentlessly pursue ‘better, faster, and cheaper’ value propositions and business model first, and only afterwards ensure that these business models are supported by the right technologies and management teams.

3. The right person at the right time…

As private company investors, we must invest in the ‘right’ management team to improve our chances of an optimal outcome. And, as mentioned above, it is generally agreed that good people can take you anywhere. – But here is another grain of salt. We caution against this maxim since any given individual (and executive) has peaks and valleys in his or her professional career. That an executive did an exemplary job in a previous position is not necessarily relevant to the investment opportunity and investment decision in front of us today. So, as investors, we are not only deciding upon the ‘right person,’ but upon the ‘right person at the right time’. For example, the executives who did a great job in their previous positions and earned significant financial gains may now be of a different mindset [and therefore not the appropriate executive for our investment]. We need to be keenly aware of this fact. Private equity firms oftentimes rely on and boast ‘repeat management teams’. In our mind, this approach is oftentimes riskier than suggested.

4. Good people are good people (period!)

There is a hard-lived rule of thumb in private equity investing that management teams – and individuals in general – can be incentivized to do a better job if they are paid more. There are significant limitations surrounding this tactic. It can easily be agreed that affluent management teams asking your investment firm for money should participate with their own capital as well, and that we should question the integrity of the business plan if the executive [selling this business plan] is reluctant to expose his or her own money. However, there are several scenarios to consider before prematurely asking management ‘how much money they are going to invest’ [and thereby prove that you, as an investment professional, only regurgitate an empty investment theory taught to you by your seniors]. ‘Money at work’ will rarely change behavior of an individual when situations become difficult. In the same manner that money rarely (read: never) makes individuals happy, financial incentive will never outweigh the strength of an individual’s character. Therefore, it is imperative to seek executives with intrinsic qualities and a relentless will to win. Time and again we have seen that a principled executive will stay loyal to the cause more than someone only in it for the money.

5. Earn your opinion…

As investors and managers, we should never assume that others will automatically appreciate or understand our input. We should never suppose that our business and investment advice should be appreciated unless we prove to our audience that our opinion is based on experience and relevant to the situation. This means that if we wish to be understood by executives financed by our firms, we need to deliberately spend time earning the attention and respect of management teams by communicating our experience and expertise. Doing this exercise correctly will create a short-cut to trust, build stronger personal relations, and allow us to increase our impact as investment partners. An audience that doesn’t know why they should listen to us – quite simply – will not listen. We believe that a patient and humble approach will yield better outcomes from due diligence through the execution of an investment opportunity.

6. Value-add responsibility…

Private equity teams must involve themselves in implementing operational value-add practices that can help moderate corporate volatility, accelerate growth, and prepare a portfolio company for exit. If there is a lack of involvement during the ownership period, the investment professionals effectively dissociate themselves from private equity’s foundational idea: to build lasting value for investors and companies by working hand-in-hand with executive management teams. In our view, private equity must be both ‘smart capital’ and ‘helpful capital’ to bring a sophisticated approach to risk mitigation and fiduciary responsibility. It means that private equity professionals must be active participants in the workstreams of a portfolio company. It means involvement with the P&L - marketing, operations, and sales - not just the balance sheet. Stewarding capital, companies, jobs, and employees necessitates the utmost engagement, accountability, and hard work of private equity professionals offered the privilege of wealth management. There should be no other way. Or private equity investment professionals are at risk of becoming the glorified, luck-seeking middleman he/she is sometimes rumored to be. 

 7. Minimize the distance…

Investment professionals will often participate on private company boards and find themselves in the position as leaders of executives and portfolio companies. In this role, we must find ways to minimize the distance between (a) what our teams and executives say they are going to do AND (b) what they will actually get done. Most [of us] can outline and ‘say’ what actions are required to arrive at a desired set of goals. But most of us also fall [somewhat or very] short of executing upon all of these required actions. As private company investors and managers, one of our finest and most important roles is to break down barriers that allow our team member to live up to his or her own expectations, promises, and plans. This duty includes, as one would expect, the proverbial ‘carrot and stick’, but also our ability to create processes, follow-up, and cultivate a friendly work environment. An often overlooked component for success of a manager is to remove barriers that prevent getting things done. Meaning, as investment professionals, we always need to make sure our team members have the right tools and equipment to effectively complete their workstreams.

Our firm, Cimbria Capital, focuses on growth equity investments in private companies in the agriculture and water-related sectors, and believes that all verticals need helpful capital, advisors, and operators that can drive executive leadership experience and organizational expertise. The behaviors listed above are preparations we have benefited from at our business – and we encourage all private company investors to adopt them if they want to enhance their value to their limited partners and portfolio companies.