The business model of Venture Capital (VC) and Private Equity (PE) is to invest in non-listed companies and after five to seven years sell the shares and realize captured value. Obviously, value is created during the time of ownership. But VC and PE not only build value as owners – they create value in three main phases:
- At Investment,
- During ownership (the holding period), and
- When exiting.
1. At Investment
If you as an investor make an investment at the wrong time in the company’s lifecycle, or at the peak of a business cycle there is a great risk of not getting the returns expected.
- Commercial. An evaluation of the market, competitors, positioning, customers, etc.
- Financial: A review of the company’s financing, balance sheet, income statement (~5 years back in time), cash flows, margins, etc.
- Legal: An analysis of patents, trademarks, ongoing conflicts, key agreements, etc.
- Personnel: Assessment of management’s past performance and ability to deliver the business plan, key personnel, review of staff surveys, etc.
- Shareholders & ownership. Verify who the owners are, who sellers are, how much of the company’s shares is for sale, etc.
- CSR (Company Social Responsibility): Ethics in business, sustainability, diversity, etc.
- Environment: Does the company have an operation that may have caused pollution?
2. Ownership Period
A well planned and structured sales process creates additional value on top of what created during the ownership period. VC and PE usually want to establish a competitive situation where potential buyers are bidding in an auction process. Read more under Exit.