When a PE partner comes on board, founders may face a challenging transition as they shift from their role as owner-operator to co-owner, CEO. These roles tend to involve different mindsets, skillsets, and responsibilities. A founder who built his or her business on risk-taking may now have an owner that is more risk-averse and will place execution responsibility squarely on the CEO’s shoulders. Navigating these management team-GP dynamics highlights the importance of transparent and candid communications and basing the partnership on mutual trust.
A common regret CEOs have with their relationship with PE firms is not pushing hard enough to get more capital upfront and putting it to work early. And PE investors may agree that this is an opportunity missed. Besides boosting confidence in the management team, making strategic investments earlier may be more likely to lead to growth before the PE holding period ends. Entrepreneurs who have boot-strapped their operations and are worried about dilution, naturally may be hesitant to request capital. This point also highlights the importance in keeping aware of the exit window. In the later stages of a portfolio company’s life a PE firm will be focused more on executing on exit strategies and less on putting more money to work.
There is growing interest by founder-led businesses to partner with PE groups to achieve accelerated and sustainable growth. The co-mingled, limited-life fund investment model is proven and now a mainstream approach that goes beyond investing capital to providing companies a wealth of operational resources, governance, sector expertise, and talent on-demand. PE is indeed a growth business.
The sheer number and variety of PE firms and abundance of capital they have available indicate that the owner-operator is in the driver’s seat. The challenge is selecting the right partner that shares your vision and values. To get there requires obtaining financial and legal help, asking the right questions, and doing your homework. As it is likely to be one of the most important journeys a founder takes, it is never too early to prepare.