I am attending the ACG Capital Conference in Durham today and tomorrow. This will feature approx 50 private equity groups and other members of the private equity ecosystem – investment bankers, lawyers, lenders, accounting firms, due diligence experts, and the like.
As I am out and about networking, I am increasingly aware of the stark difference between the private equity (i.e., leveraged buyout) world and the venture capital world, as well as the number of business folks and their advisors who are UNAWARE of these differences.
Here in the Raleigh-Durham area, there are many startup companies and entrepreneur wannabees. Venture capital is for these folks, providing funds to be invested directly into the business to fuel growth. Under the heading of venture capital, I include individual / angel investors as well – basically any money going into the business.
Buyout capital, on the other hand, typically goes into the pocket of a business owner, to acquire his or her ownership interests in a change of control. (Yes, I know, there are all kinds of hybrid approaches, but let’s keep this simple for now.)
What is most striking to me is the difference in style.
Private equity / buyout firms are friendly, accessible, welcoming, proactive networkers, and happy to recognize the value played by investment bankers. Many will gladly pay finders fees for an exclusive introduction where no other compensation arrangement is in place. When they are making the rounds in the area, they reach out to have coffee or lunch, and many have contacted me in advance of the Capital Conference to make sure we get a chance to meet while they are in town (or if I were not attending the conference, would drive over to Raleigh to say hello). Their attitude is that they have to get out there and find the good deals. They respect a business owner’s concern about confidentiality and non-disclosure of sensitive information and trade secrets and are willing to sign a reasonable non-disclosure agreement.
Venture capital firms make themselves much more difficult to get to know. Some refuse to acknowledge that any investment banker adds such value to a small deal that their fees are justifiable. Other than their own inner-sanctum of contacts, there is very little effort to support the rest of the ecosystem. We are told that you need to be introduced to the VC’s by someone they already know and trust. When there is a VC conference nearby, no one from out of town calls to let me know they are going to be in town and can we please make sure we get to meet. Their attitude is that good deals will have to find them. NDA’s… fuhgeddaboutit! If I had a dollar for every time a venture capitalist told me, “We don’t sign NDAs, period” I would have quite a few extra dollars to spend. Little wonder the term “vulture capitalists” rings true for so many entrepreneurs.
Given that private equtiy / buyout returns for their investors are 10%+ higher than VC returns over the last decade, it is amazing that more VC’s haven’t woken up from their arrogance and started changing their attitudes.