As we described in this year’s Capital Markets Forecast, “Creative Solutions for a Returns-Challenged World,” building up a private capital allocation over time is an important priority in helping our clients meet their long-term goals. As a wealth management firm with a focus on business owners in transition, Balentine has the advantage of viewing the opportunities and risks of private markets from various vantage points. As such, we recently convened three industry veterans who were able to offer us the perspectives of: an investor (Limited Partner), John Huntz; a fund manager (General Partner), Jeff Muir; and an entrepreneur, Gregg Freishtat. Moderated by Balentine Chief Investment Officer Adrian Cronje, the panel aimed to deliver an inside look at the world of private capital and how to best capitalize on today’s environment. Below are some highlights from that panel discussion.
The Current Private Capital Investing Climate
It’s so easy and inexpensive to launch something today, particularly in technology, that there are a lot of companies out there now. Everyone is trying to find the next Google or Facebook return, but most of them will be disappointed because so much has flowed into early-stage companies that aren’t very solid. Innovation is a key ingredient to success. If there isn’t some kind of innovation around the business itself then it’s very hard to predict success. It’s easy to create businesses, but hard to make them successful. This cycle seems to be one of the longer ones, but if history is any guide, we’ll see the other side soon.
Location, Location, Location!
There seem to be different philosophies in the Southeast versus the West Coast/Silicon Valley as it relates to private capital investing.
Innovation is alive and well in the Southeast, including Atlanta, Birmingham, Chattanooga, Nashville, and Greenville. Between the airport and community, Atlanta is a perfect ecosystem to invest in opportunities. The technology community is more vibrant than ever with Tech Square, Georgia Tech, and Atlanta Tech Village. Locally, there will be growth in sales automation and healthcare; however, there is typically more concentration in vertical markets among the most successful companies.
Atlanta entrepreneurs have the reputation of being “one and done”—they make a lot of money and then take a break—rather than being serial entrepreneurs. Technology and business models are changing so quickly that if you take a break for a couple of years, you will be far behind when you return.
Silicon Valley has a higher tolerance for failure; there’s a “fail fast” methodology—the idea that it’s acceptable to start a company and then, if it’s not working, fold it quickly rather than spend time to make it work. In Atlanta, those who have been most successful have a long track record of success in similar fields and also an unyielding refusal to fail. As Peter Thiel writes in Zero to One: Notes on Startups, or How to Build the Future: “Iteration without a bold plan won’t take you from 0 to 1. A company is the strangest place of all for an indefinite optimist: why should you expect your own business to succeed without a plan to make it happen? Darwinism may be a fine theory in other contexts, but in startups, intelligent design works best.”
What to Look for on Both Sides of the Table
Co-investors need to add value beyond the money they bring—this could be experience in board governance or finance and accounting, or it might be the ability to make connections. With venture funds, you are being paid to manage the fund for the continuation of services provided.
Due diligence is of the utmost importance. You have to find the right deals, and the process of vetting, structuring, managing, and exiting is very time consuming; there is a continuum of time and cost. If you’re just dabbling in direct investments, it can be very difficult. People who manage this process well have experienced, professional teams with staff members who understand all the nuances of venture versus later-stage deals and know the various players in the community.
Investors don’t necessarily win just by picking winners. There’s a lot of ongoing work beyond the initial investment that is typically required in order to be successful. It’s also harder to attract people if you don’t have the name recognition.
Going the fund route ensures that you have some diversity. Limited Partners have the ability to find deals and bring them to a fund manager to vet and structure. Angel investors should not invest all capital up front. They should reserve some of it for later rounds because the business likely will need more capital. Despite the allure of a great new idea or “the next Facebook or Google,” it is safest to invest in things you know and have personal experience with so that you can add value.
Investors looking for a private capital investment should seek someone who doesn’t just have a vision but also experience in that space and knows how to manage early growth.
Know the Risks
On the macro level, one factor to consider is the new regime in Washington. With a Republican-controlled White House and Congress, there will likely be tax and regulatory policy changes, all of which will have an impact.
As it relates to individual investments, price is only a variable when you win. There are a lot of opportunities out there that should not be financed, so you have to say “no” a lot. In frothy markets people tend to get lost in the price and capital chasing—the terms get too much attention instead of the risk.
Risks to evaluate include:
- Execution: Who is on the management team and what is their track record? Are there enough customers to provide references and allow you to look at gross margins?
- Innovation and Business Model: It’s important to remember that creating something people use is not necessarily a business, although it can be the beginning of one.
- Size of the Market: How much buying and selling is going on? Are there enough players out there that you can exit?
Thank you again to Gregg Freishtat of SalesWise and Jeff Muir of Fulcrum Equity Partners for joining Balentine in this panel discussion. Please email us if you would like a copy of the full transcript.