Successful companies are driven by strong management teams not just single-minded individuals. That’s exactly what private equity investors are looking for if they are to back businesses to the next level, says Claire Madden, Managing Partner at Connection Capital.
What is an entrepreneur? For most people, it’s someone with the drive and ambition to start up and grow a new enterprise. The Cambridge English Dictionary defines it as: “a person who attempts to make a profit by starting a company or by operating alone in the business world.”[1]
But, except in the smallest SMEs, entrepreneurship is not really a solo activity. It’s rare for one person to be the sole driving force behind a successful company of any size. For all the attention on high-profile personalities like Elon Musk and Mark Zuckerberg, most businesses are the result of a collaboration of risk-takers – a talented team with a shared vision and a range of expertise. And certainly, if your business is looking for private equity backing, investors will be interested in the capabilities and dedication of the whole management team because ultimately it will be up to them to deliver growth.
The importance of team dynamics
That’s not to say that the CEO is not important, because of course they are. They are the lynchpin of the team, the key decision-maker and often the public face of the company. But private equity investors are not looking for a genius or a maverick, or even just one charismatic leader. However great the CEO is, that person must recognise the value of being surrounded by a management team that has complementary attributes, with strengths in different areas of the business. CEOs can’t be expected to do everything, nor should they. If they are spending too much time in the weeds of operations, finance, IT, HR or marketing, then they won’t be focussing enough on driving strategy.
The team dynamic at the top is critical. Everyone must work well together. Individuals need to be empowered to have ideas and raise questions, to challenge as well as to problem-solve, in a management environment that welcomes debate and fresh thinking. Any gaps in the management team’s experience or skills will need to be filled either before getting private equity investment, or very soon afterwards. A supportive private equity backer can help here by working with management to identify where the team needs to be supplemented. This may be via the recruitment of key personnel to create more bandwidth or bring in specific expertise, or by appointing suitable non-executive directors to the board.
MBOs: another route for entrepreneurs
Starting a business from scratch isn’t the only way to be an entrepreneur. Management teams who put their own capital on the line in a management buyout (MBO) have just as much right to be counted as entrepreneurs as company founders. They may have spotted a material opportunity which the current owners either don’t see or aren’t comfortable pursuing, and the only way to make their plans a reality is to take control via an MBO. Usually, they will need a private equity investor to back the deal, who will carry out extensive due diligence before parting with capital. This will involve scrutinising the management team and its ability to implement the business plan.
Inevitably, an MBO will trigger a radical transformation of the business, and the people leading this change must be prepared for it. The skills the team needs post-MBO may be different from before. Processes, operations and structures may need to be re-evaluated and overhauled. So what private equity investors are assessing is not just where the management team are now, but also their potential to do what’s necessary looking ahead. Expectations around success will be high, but if investors believe in the team, they should be able to give them the practical, advisory support they need to achieve their goals, as well as the financial firepower.
Just as businesses shouldn’t be too reliant on any one customer or supplier, so being too dependent on an individual entrepreneur can also be a risky strategy. For those who want to take their company to the next level and require growth capital or an MBO to do so, getting there will be a team effort. While each member of the management tier has an instrumental role to play, they should act as one. That’s the key to success, and that’s what private equity investors will expect to see.
[1] https://dictionary.cambridge.org/dictionary/english/entrepreneu