9 Lessons investing in entrepreneurial businesses, and counting
1. DON’T LET THE FAMILY BUSINESS DIE WITH PAPA. Test whether you have real or perceived value in the equity of your business. If the business can’t run without you, your equity is likely worth less than you think.
2. DON’T BUILD YOURSELF A PRISON. Create Option Value for yourself. Build a business you can sell even if you don’t intend exiting any time soon.
3. MISALIGNMENT MAKES BAD BED PARTNERS. Have courageous conversations upfront about what all parties to the investment really want. Once you have a touch-stone, you always have something to go back to.
4. OVER-PAYING OR OVER-PROMISING IS A RECIPE FOR STRAINED PARTNERSHIPS. Build and share realistic goals and seek more value on the back end. 5-10 years is a long time to be battle uphill together.
5. FAILURE TO LAUNCH WHEN YOU DON’T HAVE A STABLE FOUNDATION. Great growth plans are fantastic but if you don’t have a solid foundation with all the boring stuff in place (financial management, performance management, governance, systems, processes) then when you come to launch the rocket, cracks and KABOOM.
6. SUPERMAN’S CURSE AND THE SCALABILITY CEILING. All or most entrepreneurial businesses hit a growth ceiling at some point, whether it’s at R20m, R50m, R500m or in the billions. It usually has to do with how a business has grown up around a central founder, and not necessarily an unwillingness on the part of a founder to let go. Key man dependence is one of the most significant destroyers of value in an entrepreneurial business. We work with immense focus on an aligned strategy to reduce this reliance and maximise equity value for the founders.
7. TO SOME IT’S A 6 AND TO OTHERS IT’S A 9. THERE IS VALUE IN PERSPECTIVE. Private equity investors who bring experience from across multiple companies and from start to finish are able to share perspective that many founders, who may have spent their entire careers in a single company, does not have. It’s not right or wrong, it’s just the power of pattern recognition that can help a company not learn only from their own mistakes. (but be careful of pattern recognition. It can also sustain status quo and be an enemy of diversity).
8. BACK TO THE CAVE. This has become essential Sanari terminology and when we say the founder has gone back to the cave we are not calling her or him a Neanderthal! The terminology is call for us to focus on how we can sustain new and necessary changes in entrepreneurial businesses. We typically see enormous commitment and enthusiasm for a new growth strategy, but when the going gets tough, as it does, there is an understandable tendency for founders and incumbent management to revert back to old ways of doing things – behaviours that once resulted in great success but which may no longer hold the same relevance today. Sanari serves as partner in this journey with the understanding and experience of what is needed to make these sometimes painful transitions.
9. FINANCIAL (MIS)MANAGEMENT IS NOT ALWAYS WHAT YOU THINK. When the numbers look a little funny we immediately think fraud and manipulation. Sadly there are those times, but in our part of the market we equally see the times where management though they were doing it all right but where the skills and capabilities to deliver sound financial management were just not there. It’s messy but the sooner you clean up shop the better your quality of earnings – Sanari’s first focus area is the financial function. We bring specific expertise in small and medium size companies, technology enablement and independence to the function.
Follow our blog (Perspective) to learn more about each theme/lesson.