“I hate my private equity firm.” I’ve heard some version of this statement from a number of CEOs in private conversation. Yet, these relationships, like most, start out full of hope and possibility. At first, it’s all warm and fuzzy–shared vision, talk of “changing the industry”, and expectations of great financial rewards for everyone. Then, something happens, and all those sweet feelings turn sour. So, you can imagine my surprise and delight, after more than three years and 160 shows, we finally had a CEO bring his investor on CEO Exclusive with him.
For a private equity firm like Accel-KKR, a potential partnership is more than “a pretty balance sheet” and corporate spin. As Rachel Spasser, Chief Marketing Officer and Operating Principle for the firm, makes clear, a successful deal comes down to successful leadership and the proper management. Recently, Accel-KKR invested in the marketing technology firm ClickDimensions, bringing on CEO Mike Dickerson and giving his team a chance to show off their skills in the competitive and growing industry.
CEO Exclusive got the rare opportunity to discuss the relationship between funding and leadership with these two business leaders, addressing some of the seismic shifts happening in offices across the B2B world, as well as the disruptive nature of technology and how it affects the consumer. But, one of the most telling parts of this otherwise in-depth conversation was how CEOs and investors interact. I really wanted to know what happens when things go south and more importantly, how to keep the PE relationship on track.
It’s About More Than Money
Tim Berry, writing for Entrepreneur, sums it up simply: “Investors aren’t just about gaining access to money. They’re partners and, to some extent, they’re also bosses. And, just like the wrong spouse can wreck your life, the wrong investors can wreck your business.” Don’t you just love the idea of having a boss? Especially if you are Founder/CEO… this must really warm your heart.
Rick Frasch at Forbes is a bit more blunt: “An entrepreneur’s thinking process is often to make the world a better place, create a long-term business that will keep him or her engaged and richly employed. By contrast, the investor’s thinking process is usually ‘How do I make a lot of money in a short to moderate time frame (3 to 7 years)?’ Guess who’s thinking process controls whether the entrepreneur closes on an investment?”
It’s easy to see where the disconnect can occur. A clash can and will come with issues of control. The money folks want their money back plus a healthy return (the faster the better). If business doesn’t go according to plan, you may be held accountable in new and uncomfortable ways. A PE firm may view the business vision, model, strategy, and culture in a completely different way. How these kinds of conflicts are handled can dictate whether the PE relationship succeeds, or slowly sinks into a quagmire.
For this reason, many management teams avoid PE money like Ebola. Jason Fried of Basecamp has turned down money from over 100 potential investors for one succinct reason. As he told CNBC’s Make It, “Basically, when you take other people’s money you owe them something. You either owe them money back or a business decision that is kind of no longer yours. Often times, that means selling the business or being acquired and being run by someone else, and we don’t ever want to do that.” It’s a battle between autonomy and answering to someone else.
Don’t Dictate – Collaborate
Luckily, Accel-KKR understands this tension. Spasser sees her role in the partnership as part of a two-way street. “One is, how does the private equity firm approach the relationship with the CEOs,” she says, “and second, how do CEOs work with the board to make sure they stay aligned.” Perhaps the most important part of the process in her mind is navigating the highs and lows together. No finger pointing allowed. “We’re not here to run the companies,” she adds, “we’re here to help.
So clearly, she’s not out to tell ClickDimensions what to do. But this doesn’t mean they have 100% free reign. In fact, it was Spasser who recruited Dickerson for the role of CEO and together they are mapping out how the company will continue its growth and forward momentum. A true collaboration. So, how do you go about finding a partner who will aid in your mutual goals?
Culture can help. Yup, even in the private equity relationship. “Culture is really important and cultural fit is really important when selecting firms to work with,” she says. “I think it’s really important to align your investor or your financial backer with your own culture and to make sure if it’s a good fit. If not, it can be painful.”
Practice the 3 “T”s – Transparency, Truth, and Trust
If that subheading seems like a given, you’d be surprised at how often one of these three important partnership tenets slip into the background over time. Many companies want the cash, but not the accountability. They want to spin the good and hide the bad. For someone like Spasser, that won’t fly. “Nothing is given in business,” she says. “We’re living in challenging times, and most of our companies are in highly competitive spaces.” She wants to give her CEOs the freedom to run the businesses themselves, but with some very clear caveats.
“Transparency is critical to us,” she adds. “We want the happy and the sad, because we can’t help you if all we get is happy. We pride ourselves on facilitating transparency from our perspective and finding CEOs willing to be transparent with us.” From her perspective, don’t try to be manipulative. Cough up the truth even when it sucks. You can’t have a successful partnership when specifics are being hidden.
Effective due diligence on the part of the private equity firm is also critical. In her mind, it helps uncover the potential landmines that may cause the collaboration to explode. “Everyone is fallible,” she says, “when we dig in with really good questions, we can find areas that are…squishy. Fundamentally, this is a trust question, and trust goes both ways. You have to have open, honest conversations about that. It’s the only way to have a constructive relationship.”
Relationships are hard. Especially when there’s a lot of money involved. Even more when you’ve brought someone into an endeavor that you’ve been working on for years, maybe decades, maybe even most of your life. Yet, the fundamentals that guide the health of any relationship apply here, too. I guess it shouldn’t be surprising. Private equity investors are people, too.