When I look for unique ways to approach the private equity markets I sometimes ask myself, how do the current venture capital and private equity models currently work? Venture capitalists typically utilize proprietary deal flow, unique skills, relationships, reputation, and Limited Partners’ dollars to buy sizable chunks of tomorrow’s innovative publicly traded giants. Ideally you can “Buy low, sell high.” It is always important to remember that if you believe in efficient equity markets or “Random Walk Theory” then it is critical to buy well, because the market will dictate the exit pricing.
I have noticed a specific trend forming with the business models and companies that I like to work with. They fall into five groups:
Capital Efficiency
Lower capital needs give the opportunity to provide higher return on investment
Flexibility
If you limit your fixed assets it makes it easy to change strategy and be nimble as competition enters your market.
Leverage
Most companies can learn a lot when they try to reduce required capital by leveraging resources available in the industry, environment, competitors, partners, and government. If you don’t need to create something from scratch then don’t.
Profitability
Both gross and net margins must justify the investment and the valuation.
Quick cash
I really like it when a company does not have to wait 3 years to get a large inflow of cash. If you can work on short cash collection cycles it helps you manage your profitability with a more systematic approach. If you can get cash and then build a product… even better.
