Jack was in love with his new product.

It would make an impact, maybe not change the world, but it was good. His mother, his wealthy boomer uncle, and some high school buddies had funded his business during the early years. Things had been up and down but his first products had sold well. More importantly, his customers were proving to be loyal returning each year and bringing in solid revenue: his business model worked. He could pay the bills, reward his employees and predict a steady cash flow of over $2 million, but if he wanted to grow, it would take serious money; private equity money.

Jack felt confident that he knew how to attract private equity investors every newspaper and magazine seemed to dissect. After all, he could see the hidden value in his business—why wouldn’t they? Jack imagined meeting bankers or finance guys or, hey, maybe one of those Fund Managers on Wall Street, Bay Street, or The Valley his son-in-law mentioned. Once they took the time to understand the sheer beauty of his technology, their wallets would open sesame and he could get cracking on rolling out the new marketing plan.

So Jack went all over the city, calling up private equity funds he found on the Internet, sweet-talking about his product, and asking for money (he had read in Fortune that you must propose a certain dollar amount to get the funds.) At first, the doors opened, but man, these finance guys were hard to read—faces like Easter Island stone statutes. Jack puzzled about how rapidly he was shown the door. 

One Friday, after another long week of fruitless discussions and returned envelopes containing his business plan, Jack finally sat alone in his office. No cash! He put his head down on his desk and sobbed.

What went wrong? Why couldn’t people see the potential, the upside, and the sheer genius of his product? Was he the only visionary? If these finance people couldn’t understand the power of his new product, what good were they? Someone said—and I can’t remember who—there’s nothing in the world so demoralizing as money and they are absolutely right. 

Companies that attract investors begin the process by understanding private equity’s point of view. This sounds obvious, but not understanding what the investor wants to know is the main stumbling block to attracting investors.

Yet, with just a little insight into why private equity often seems like oil to the entrepreneur’s water, Jack’s prospects could change drastically.

Investors speak a foreign language 

Jack’s growing frustration as he met more and more of the guys with the money, caused him to speak in an increasing frenzy about his marvelous technology. He morphed into some crazy John Cleese in that popular British comedy called Fawlty Towers, as he struggled to make Manuel, the Spanish waiter, understand his orders. Basil Fawlty would shout louder and louder as if this would help the translation. Why couldn’t Basil understand that Manuel’s point of view was very different? Imagine if Basil learned a few simple phrases in Spanish, such as, “Please carry the bags upstairs for these guests.” Of course, then we would never have had the comedy of misunderstandings. 

On the other hand, Jack is not an actor, and his misunderstanding of investors’ language is not amusing. He needs to come around to the investor’s side of the table and get seriously inside their heads. What is their language? What are the key phrases? What gets their attention? And there are only four questions every investor needs you to answer. (These will be covered in part three of this book.) 

Finance is their language

Here’s Jack’s problem. Simply put—finance people do not want to hear about your product...at least, not at first. Instead, they want to hear about the financial potential of your company. 

That’s right. 

Before you get on your soapbox about the heartlessness of private equity people, understand that although they are maybe engineers, computer whizzes, or technology geeks, that specialty is their secondary focus. What they are interested in doing is making an investment and over 5 years, creating profit. If they were like you—in love with doing business—they would be on your side of the negotiation table. Moreover, those finance people have limited time—growing ever shorter—and their competitive advantage comes from finding the next deal that will be the golden egg in their own investment fund. 

They are not interested in the nitty-gritty of Jack’s product until they see the glimmer of the potential to earn cash. They do not care about the beauty of his software demo until they care about the return for risking their money with Jack. They do not see value in learning about how Jack’s product does cool things until they first see financial fit. 

Once the investor accepts that there may be fit with their current portfolio and type of company they like, only then do they move onto the business itself. Then the conversation builds as they want to learn about the big picture, the exit plan, who could buy them out, and the money to be made over the next five years. 

Investors talk about cash

Does this money objective seem harsh, repellently crude, a brick to the head? Is it like a forgettable comedy of a man asking a woman on their first date to have his baby—just rude and sociably cringe-worthy? Many business owners, burnt by meeting experiences with private equity, question how these finance guys do not get passionate about a product and usually end with the cliché question, “Do they have ice in their veins or what?” 

It’s also popular to say that private equity fund managers are the black heart of the business, the crucible. This could not be further from the truth. The finance view (them) and business view (you) are both essential building blocks of growth. Like the chicken and the egg – which comes first? One answer to keep in mind during the process of finding money from private equity people is that both the chicken and the egg are equally essential.

What these business owners (along with Jack) failed completely to recognize is that for venture capitalists and fund managers, money and high returns are their products. They look for a Stage 3 Legacy Business that gets the meaning of investment and understands the relationship. Why waste each other’s time if it’s not a financial fit?

Of course, fund managers are wonderfully curious about business and products. In fact, you will have to search long and far to find another group of businesspeople with such broad knowledge. The difference between Jack and the investor is that Jack is in the business of selling widgets. Investors are in the business of selling return on their capital, effort, and time over the next five years. 

Private equity investors will make an investment decision based on facts about the finances of the business as their job is to generate investment return from the assets they manage. Level 3 Legacy companies understand the strength that private equity brings to their partnership. Level 3 Legacy companies know why it is imperative that private equity’s priority is financial information.

If Jack gets a $100 investment, he will not only return that $100 after five years but Private Equity investors will expect a healthy 12% or 25% or 40% extra, depending on the stage of business. If the odds are good, Jack’s company can achieve this rate of return, he will get the money. Otherwise, the investor might as well give their $100 dollars to a mutual fund listed in Barons’ Top 100 Funds to get a dull but predictable return—or buy a lottery ticket every week over the next five years. 

Get a phrasebook

Make no mistake, as much as Jack wants to hear the words, “Jack—we love your business!” the investor also wants to say it with absolute conviction. Jack did not learn at first; he assumed every investor had the attention span of a goat. Not true. 

Yes, you can reach investors, but you must know what to say to peak their interest points (those first minutes are crucial) or you might as well spend the meeting with your head in a bucket. If investors are unconvinced, they move on to the limitless display of opportunities available to them. Jack would have increased his chances enormously if he had the small details that seem inconsequential to him, but that the investor craves. Don’t put down this book in abject misery, we will get to the enthusiastic stage much more easily than you think. You are in good company. It is my experience that few owners are great at raising money—it’s not their expertise. Don’t be like Jack and think that since you are a great salesman for your business products, it follows that you can sell your business. Then, when investors say the finances are weak, go away crushed.