Resilience and dogged belief will be required through the dark hours but Level 3 Legacy companies confront the reality that their business may not be suitable for private equity in its current form. They seek to understand how to build those features into their business. The finance community is small and you rarely get more than one bite at the apple. What this means is that there is loads of money out there to invest in you at the drop of a hat. The bad news is that money can drain away just as quickly as the tide pulls back into the ocean. By randomly using a shotgun approach and calling up anyone and everyone before he was properly prepared, Jack made an ass of himself. This does not have to be your story.

In Jack’s case, he treated his meetings with private equity lightly as if on a fishing expedition. News spread rapidly that he was an amateur, poorly prepared and badly marketed. Jack, unknowingly, became a low opportunity investment, seen to be disrespectful of others’ time.

Randy Pausch, a Carnegie Mellon University professor who created the Alice program which allows anyone to create onscreen animation characters, was given a shocking diagnosis of cancer with a few months to live. When he gave his poignant last lecture, he chose to talk about attitude, “I believe that when you are told no, when you hit a brick wall, that it’s put there to help you decide what you really want.” If you really want the financing, find out how to get around that brick wall and try new ways. Do not see it as a final no, but as a temporary block in your journey.

Taking a company from Stage 2 Owner Controlled to Stage 3 Legacy is a challenge to everything you do today. As you begin to meet Private Equity investors, pursue their opinions of your business and what would make it a better investment.

When you hit a brick wall with a private equity fund, ask (nicely) why they do not see an investment opportunity. You may be surprised. Perhaps you have put too much cash into a building rather than growing the company. That conservative approach to looking after the value of your business may signal that you are comfortable at a Stage 2 Lifestyle business and do not have the guts to take the risks the private equity guys require.

A day care business, Kids + Company, had seven centers and a long track record of steady revenues but thought they were too mundane a service company for private equity investors. However, despite spending more than their revenues they attracted private equity by developing a five year plan to roll out a national day care chain and put in place a committed team.

Accept that it’s oil and water

Level 3 Legacy companies know that the first building block of putting together a private equity relationship is to understand how different their view will be in comparison to the investor. When dealing with private equity, the owner must realize investors are very different which makes the relationship challenging. This creative tension does bring more to the business than the entrepreneur smooth sailing on their own.

In order to gain the investor’s attention requires an understanding of the differences in order for the entrepreneurs to build the relationship:

Ditch the sales pitch and lead with the financial story.
Think Return on Investment (ROI).
Respect the risk taken by private equity—and if you are not investing in your own business, why should they?
Listen and take feedback as this will be the most useful and honest analysis about the long term viability of the company.

In reality, Jack’s product did eventually earn big returns and he convinced the city’s top venture capitalist to invest—but only once he understood how to market the value to the right financial investor.

Take Aways

Entrepreneurs, business owners and CEOs of companies will discover they are very different from investors.
Do not mistake cool financial acumen of the fund managers for coldness towards the business opportunity. Rather, ask about their perception of your business as a long term, exciting investment opportunity.