I spend a lot of time talking to private equity and venture capital decision makers. I do this for a number of reasons. First, you can learn a lot from people who are working with multiple businesses in multiple industries every day. Second, most private equity networking events usually revolve around very good wine.
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People generally consider private equity and venture capital decision makers financially focused. Most PE executives understand the "business" that their portfolio companies are in, but all understand the "financials" of those businesses. Surface conversations often revolve around the availability of credit and the appropriate types and levels of financial leverage to apply to different types of situations.
When I've served on the executive team of a companies controlled by a private equity firm, at every board meeting, we knew that everyone on the management team needed to be ready to talk about the numbers. All the numbers. Any of the numbers.
As I've grown closer to PE and VC people over the years, or perhaps as we have shared more wine, I've come to hear an important insight resulting from a question I have now asked countless times:
“What is the biggest determinant of how large a return you can earn from a portfolio investment or how fast you can realize that return?”
The answer comes back almost universally the same: It is not the financial structure, or the industry opportunity, or the patent protection. It is the Management Team.
“Bet on the jockey, not the horse” they tell me. A company in a great industry with a strong balance sheet and mediocre management will never perform as well as a company in a mediocre industry with a great management team. “The financials are important only in as much as the management team understands them and knows what to do about them.”
So how do CEOs seeking funding from a venture capital or private equity company show off or strengthen their management teams? They make sure they know and understand the financials. They know it's is not enough for the CFO to know the numbers. The marketing lead needs to be able to talk about profitability by market segment and product line. The sales lead needs to be able to talk about customer profitability and the key drivers. And the operations lead needs to be able to talk about the operating factors that drive cost efficiencies or financial returns from capital investments.
There are a lot of things that are beyond the control of a CEO. But the management team is not one of them. The CEO ultimately has the ability to choose his or her management team. And with the right group of jockeys on that team, they can carry the business across the finish line.