The Most Essential Attribute You Should Look For in a Capital Provider
In evaluating prospective capital providers, savvy entrepreneurs have come to understand that while capital is their number one priority, there are other attributes they need to evaluate before they say “yes” to an investor.
I understand why entrepreneurs are increasingly interested in more than just an investor’s willingness to invest. Industry expertise, legal counseling, networking opportunities, and other resources are typically high on entrepreneurs’ list of other investor attributes that influence their decision.
For 10 years I was an entrepreneur myself, having raised more than $200 million in both public and private markets. With each new venture, I learned more about the process and what it means for both the company and the investor. Over the course of a 30 year career, I have served as CEO and CFO of both publicly traded and privately held companies, and have been on boards representing entrepreneurs at various stages of growth who were building businesses and continuing to look for capital along the way. Through all of these glasses that I’ve worn and various perspectives that I’ve had, I’m convinced more than ever that the most important attribute in a capital provider is patience.
Patience breeds great companies
There are many worthy capital providers out there, each with their own strengths and weaknesses. While every capital provider by necessity must think about an exit strategy for each of its investments, it shouldn’t be pounding its fist on the table because it needs to find a way out to satisfy its own financial constraints. From my perspective, success is best achieved with a more patient approach.
Too often we find the timing of an exit drives the manner in which the investor influences the entrepreneur’s decisions. But in building a great company, an exit should be a natural, not artificial, outcome. It’s for this reason that domain expertise is so valuable in any capital provider. By focusing on augmenting a company’s strengths and improving its weaknesses, a VC can become a vital partner in guiding a growing business toward success, which in turn creates value and leads to a more natural exit.
Case in point: Clarient
Take former partner company Clarient, for example. Safeguard deployed capital in Clarient all the way back in 1996, when the company was developing digital microscopes that would analyze tissue and blood samples to help diagnose various diseases and medical conditions. In 2004, when Clarient was struggling mightily, Safeguard stepped in with new ideas on how the company could reposition and rebrand itself, shift directions, and focus on opportunities it had in cancer diagnostic services
Throughout the process, Safeguard was an active partner, providing everything from follow-on rounds of equity capital to executive management recruitment to sales and marketing expansion. In 2010, 14 years from our initial capital deployment, GE Healthcare acquired Clarient for $587 million. Everyone ended up a winner — Clarient found a strategic partner that would enable it to continue its growth trajectory, and Safeguard realized a 3x cash-on-cash return on its remaining cost basis in its holdings in Clarient at the time of the acquisition.
Many other investors may have been forced to pull the plug as Clarient struggled, due to a need to exit under some preordained timetable. If so, Clarient and its investors would have foregone an opportunity to build a great business and generate fantastic returns. Because Clarient was funded through patient money, the full value of the business was allowed to blossom over a timeframe that was best for the company, not dictated by the investors’ voodoo formula.
Bottom line: Seek out patience
While your search for a capital provider likely includes considerations like how much capital you need to complete the next stage of your company’s growth and what expertise can help you get there, look also for capital providers that have a more evergreen funding model and have exhibited patience with their portfolio companies. Plain and simple, patient capital keeps the focus on your idea, allows you to build a better business, and more frequently ends in success.
This post was written by Stephen T. Zarrilli