Today we announced the close of an $11 million financing round, led by Comcast Ventures. We’re excited about this milestone and think it serves as more confirmation of several interrelated trends we’ve been seeing in the private capital markets.
Business Owners Are Going Online
One of those important trends is that business owners are going online to begin the process of searching for and securing capital. Business owners have already relied on internet resources and software solutions to educate themselves about their industry and their company. The same practice is now applying to their exit strategy.
As baby boomer entrepreneurs move closer to retirement, the internet is becoming a place of first resort to conduct independent research on and to seek advice concerning an exit strategy for their businesses.
The deal professionals that are already established with an online presence are best positioned to find, be found, and communicate with relevant business owners.
As business owners look for help to grow or exit their businesses, they are not looking for just any investor. As Aubrey Smith of Cowen pointed out, “Most entrepreneurs are looking for partners — someone that can help them grow, not just provide capital. I think many of these owners learned during the recession that having money can’t get you all the way there.” Business owners are seeking partners with deep industry knowledge, connections, and skills.
Benjamin Gerut of Kuzari Group agreed with Smith’s analysis. “I really believe that most of these retiring entrepreneurs want more than a simple check; they want a real transition with real mentorship…they want succession,” he said.
Specialized financial sponsors are proving better at attracting the attention of exiting business owners. Demonstrating clear knowledge of a company, understanding of a market, and interest in partnership can be extremely appealing to retiring entrepreneurs that have never previously engaged with institutional capital.
We have seen this type of specialization grow as more financial sponsors choose very selective transaction profiles on Axial. The specific criteria allows them to simultaneously have targeted deal flow and demonstrate their core competencies.
The Rise of Business Development Professionals
Even with specialization, many firms are also revamping their strategy to include dedicated business development specialists. Business development (BD) is the set of activities that help you overcome the scale, transparency, liquidity and standardization issues that define the private capital markets.
As investment banking continues to fragment, the firms with dedicated business development efforts are positioned to realize deal flow of greater quantity and better quality. With a business development professional, firms have gained competitive advantages through the depth and scope of their relationships. In addition to the more robust deal pipes, firms with BD professionals will be able to spend greater time optimizing and growing their portfolio companies.
The demand for valuable BD professionals is likely to only grow with time. As competition between firms prioritizes innovation, creativity, and unique resource allocation, the firms that are able to think outside the box will be able to realize better deal flow and LP support.
As Wayne Sills — Founder of Sills Associates Executive Search Consulting, which provides executive selection assistance to private equity funds — explained, “The standard model has been to have senior management and members of the deal team source deal opportunities, but based on what I’ve seen and heard I think it is clear that one dedicated person doing BD 100% of the time will be much more productive than 4 people doing it 20% of their time.”
The job function has become increasingly valuable as a focused role in today’s PE world. Increasing competition for prime PE target companies has caused many GPs to re-evaluate their sourcing strategies and look to BD professionals to increase deal flow. As a result, we’ve seen a growing number of professionals embrace tools like Axial and the four quadrants of business development to improve their strategy.
Blogging and Social Media
Since most business owners are using the internet, many deal professionals are also building out their online presence through blogging and social media.
PE blogging is a still-nascent area of online business development, but will soon prove to be one of the most important channels to distinguishing yourself from the crowd.
As David Hornik – the first venture capitalist to begin blogging over a decade ago – wrote, “blogging has become an incredible megaphone. Over the years, millions of people have read what I have to say about venture capital and entrepreneurship.” He continued, “In combination with the powerful amplification of social platforms like Facebook and Twitter, [my blog] has proven a valuable tool for me and my firm to rise above the noise.”
To help accelerate these efforts, Axial Forum launched an Expert Publishing Platform in mid-June. Since creation, there have been over 10 Expert contributors. The positive response of the program indicates the dealmaker’s interest in establishing an online presence.
Family Offices are Becoming More Present
The pursuit of knowledge via the internet by business owners has also caused the general activation of a long-discreet investor group: family offices. Spurned by the public markets, many family offices are seeking to become active players in the private capital markets.
As a result, dozens of family offices have started to embrace publicity. “They want to be known in the marketplace to the right parties because they want the deal flow. Not many have this mindset today but that is a very early trend I’m just now starting to see this year and I’m sure will continue,” said Richard Wilson. “There are new family offices starting every day. As the industry grows, there will be family offices that are set up that recognize the benefits of being public.”
We are already seeing this increased publicity on the Axial network. Over the last three years, the number of family offices on the network has grown 205% percent. Additionally, these family offices are resolving their dealflow issues by becoming more active –the average family office pursued 20 opportunities in 2013, up from only 6 in 2011.