Podcast Summary

The Path to Exit — Episode 19

7 Questions Founders Should Ask PE Firms
Host: Mike Lyon, Vista Point Advisors
Guest: Jeff Bean, Vista Point Advisors
Date: August 13, 2024

Episode Overview

In this episode, host Mike Lyon and guest Jeff Bean—both managing directors at Vista Point Advisors—dive deep into the critical questions that technology founders should ask private equity (PE) firms when considering a partnership or sale. The conversation unpacks not only what founders need to know about fund dynamics, sector expertise, and the realities of working with PE firms, but also how to unearth the real motivations and capabilities behind the polished sales pitches. This episode is a must-listen for software and internet founders eyeing M&A or capital raise transactions.

Key Discussion Points & Insights

1. Understanding Fund Size and Fit

Timestamps: [01:07]–[02:40]

• Why ask about fund size?
  Fund size offers clues to the PE firm's ideal investment size, ownership targets, and whether your deal will be significant to them.
  • "If you're looking to raise $50 or $100 million... and their fund size is 200 million or 300 million, the math is just not going to equate." — Jeff Bean [01:13]
• Follow-up: Ask about the specific fund they’re investing from, not just overall assets under management. Probe how much “dry powder” (undeployed capital) they have left.

2. Analyzing Target Return Expectations

Timestamps: [02:40]–[05:18]

• What returns are PE firms seeking, and why does it matter?
  The target return reveals how aggressive (or not) they'll be with your company and what level of risk or intervention you might expect.
  • "If they're looking for a 2x or 3x return over five years, that probably screams not very aggressive, right? More passive. If they're looking for a 3 or 5x return over 3 or 5 years, they're trying to create a lot of value." — Jeff Bean [03:13]
• Understanding their historical performance (track record) can be critical, especially if you’re rolling significant equity.

3. Role and Involvement of Senior Partners

Timestamps: [05:18]–[06:51]

• How active are the partners post-deal?
  • Different funds (and even different partners within a fund) run the spectrum from “hands-off” to highly involved, operational partners.
  • "You'll have other investors that are much more passive, kind of along for the ride... Understanding what resources you'll have available... is that kind of a push-pull relationship? Do they push it on you, or do you have the options for it?" — Jeff Bean [05:50]
• Question if they charge for these “value-add” services and how meaningful their operational support is in the real world.

4. How PE Firms Navigate Tough Situations

Timestamps: [06:51]–[07:56]

• Don’t just focus on their highlight reels:
  Ask for references and experiences concerning deals that didn’t go as planned.
  • "Trying to uncover a situation or an example of an investment that didn't go great... is going to be a lot more telling in terms of how they operated under stress." — Jeff Bean [07:33]
• Observe their conduct under pressure—even during your own deal negotiations— to get a feel for their true style.

5. Sector Experience and Market Understanding

Timestamps: [07:56]–[10:12]

• Why does sector specificity matter?
  PE firms with deep industry experience can contribute more from day one—and they won’t need you to teach them the basics.
  • "You definitely want someone coming equipped with sector experience... instead of you educating the investor... they'll just be intimately involved in the business." — Jeff Bean [08:54]
• Ask for real examples, and test their claims by requesting introductions or referrals in your space before you pick a partner.

6. The First 100 Days After Closing

Timestamps: [11:07]–[11:45]

• Why ask about the post-close plan?
  Understand how the PE firm thinks about immediate changes, resource deployment, and their definition of success.
  • "That's your ability to really learn instantly what is life going to be like under this new ownership, under this new partner." — Jeff Bean [11:07]

7. M&A Strategy: Aggressive Acquisitions or Steady Growth?

Timestamps: [11:45]–[13:23]

• How should founders probe the firm's appetite for post-deal acquisitions?
  The fund’s history and available capital will speak louder than promises.
  • "I think a good way to start that conversation is to understand what they've done in other transactions, what they've done with other portfolio companies... Have they on average done three transactions post or have they done five?" — Jeff Bean [12:13]
• Real fund size can drastically limit a post-close acquisition spree, regardless of what the sales pitch says.

Notable Quotes & Memorable Moments

• The Sales Side of PE Firms:
  "PE investors are phenomenal salespeople who can present themselves as the right fit, but founders need to discover the true dynamics of the fund." — Mike Lyon [00:26]
• Evaluating Claims:
  "Almost every firm markets that. But in our experience, there's a big difference between what they actually show up with later once you do a deal." — Mike Lyon [06:51]
• Founder Empowerment:
  "When you get these phone calls... they're trying to get data from you. But I think you should view that as a two way street because you're trying to interview them." — Mike Lyon [13:56]
• Dig Beyond the Pitch:
  "Everyone in this market is pretty good at sales and marketing, so go a little bit deeper than just the answers to the questions. Ask for data." — Mike Lyon [14:25]

Timed Segment Table

| Segment | Topic | Key Quote / Insight | Timestamp | |---------|-------|---------------------|-----------| | 1 | Fund Size/Fit | "The math is just not going to equate." — Jeff Bean | 01:13 | | 2 | Target Return | "If they're looking for a 2x or 3x return..." — Jeff Bean | 03:13 | | 3 | Senior Partner Role | "Partners have different views on how proactive they are." — Jeff Bean | 05:50 | | 4 | Handling Trouble | "Trying to uncover a situation... that didn't go great." — Jeff Bean | 07:33 | | 5 | Sector Experience | "You definitely want someone coming equipped with sector experience..." — Jeff Bean | 08:54 | | 6 | First 100 Days | "That's your ability to really learn instantly..." — Jeff Bean | 11:07 | | 7 | M&A Strategy | "A good way to start that conversation is to understand what they've done..." — Jeff Bean | 12:13 |

Final Takeaways

• Ask direct, specific questions about fund size, investment history, and post-close operations.
• Insist on data, references, and real-world examples—don’t just accept sales pitches.
• Recognize that choosing the right PE firm goes far beyond check size or headline return promises; fit, experience, and proven alignment matter most.
• Interview the investors as rigorously as they interview you.

The episode arms founders with a concrete, actionable framework for vetting PE firms—ensuring a more informed and empowered path to M&A or capital raising.