Private equity investors and entrepreneurs approach business differently. Private equity firms can use entrepreneurs’ approach for better success.
Both private equity investors and entrepreneurs are driven by the need to grow a business with a similar end goal. However, the approach they take to grow a business is entirely different. In brief, investors and entrepreneurs may have the same goal, but their approaches to work are separate.
To raise capital for business, entrepreneurs must know the way investors think and work. Private equity investors can also learn from the entrepreneur’s approach to work.
Most private equity investors approach their targets in terms of size and industry. This is a friendly approach to find potential businesses for investments. However, a much better criterion is earnings and growth. Growth is the number one creator of value in private equity. While most investors are aware of this; there’s a disconnect between the truth and how private equity firms behave.
Most private equity investors want to immediately deploy their capital based on past performance. Private equity investors can try an entrepreneur’s approach here. By keeping the end in mind, investors can look for companies that can grow fast as entrepreneurs do.
Private equity investors can work toward developing a growth mindset. This is a common trait among the best entrepreneurs in the world. Elon Musk’s success in sending SpaceX to the International Space Station and Thomas Edison’s success in the invention of the lightbulb is attributed to a growth mindset. The growth mindset recognizes that success can be achieved through effort and individuals embrace the challenge because you know anything can be improved upon.
Private equity firms can work towards building the same growth mindset in their teams. If they do so, firms can achieve the same result.
For private equity firms, success is measured after the acquisition is grown and eventually exited. Success is sowed during the acquisition process when a PE firm is looking to buy a potential business. PE firms should realize that the future is not just the company, it’s the company plus them.
This brings us to an important question: What does a private equity firm bring to the table apart from capital? This is a critical concern that many PE firms are failing to address and a reason why so promises fail after being acquired.
Developing a collective mindset within a PE firm can overcome this problem. It starts with building a bench of capable leaders and then matching them with the right growth opportunities. Typically, firms look for an opportunity and then find a competent manager. However, it is a suboptimal, backward approach. A Leader-first approach and not a deal–first approach allows private equity firms to unlock the true growth potential of an acquisition. Capital isn’t enough to do that, right leaders can.
Overspecialization is another factor that is killing PE firms. Private equity firms shouldn’t define industry so specifically. The fundamentals of running a business are the same. The skills you will use for running a healthcare company would also help you grow a CPA firm. Overspecializing is a limiting factor that should be excluded.
Just as good entrepreneurs focus on building the best companies, PE firms can focus on matching leaders to macros industries in which they excel.
Instead, firms need to focus on matching their leaders to the macro industries in which they would excel. Just as the strongest entrepreneurs build the best companies, private equity could leverage the strongest leaders to create a portfolio of thriving, innovative companies, as well as above-average returns.