19 | 7 Questions Founders Should Ask PE Firms

Summary

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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

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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.

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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.

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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]

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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 |

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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.

Transcript

[A]

Welcome to the Path to Exit, a podcast to help software and Internet founders understand the process to raise capital or sell their business.

[B]

Hello and welcome everyone. I'm Mike Lyon, Founder and managing director at VistaPoint Advisors, and this is the Path to Exit. This show is dedicated to helping founders of software and Internet businesses understand what it takes to raise capital or sell their business and how to do it well. My guest today is Jeff Bean, managing director at VistaPoint Advisors. In today's episode, we'll discuss what questions you should ask a PE firm to understand if they're a good fit for you. Interest from PE firms can be flattering, but it's important for founders to understand that not every PE firm will be a good fit for your company. PE investors are phenomenal salespeople who can present themselves as the right fit, but founders need to discover the true dynamics of the fund, particularly as you consider the long term term relationship. Let's walk through a few questions founders should ask private equity firms to get a sense if they're a good potential partner for them. Jeff, thanks for joining the podcast again.

[C]

Yep, absolutely. Happy to be here.

[B]

Let's start maybe with the fund size question. How would you use that to get a sense if they're a good fit for you?

[C]

It's a good question. So fund size can give you insights into many things in terms of how the PE fund thinks about investments and the right check size for that fund. Typically, a lot of PE funds, they're going to think about writing maybe 10 or 12, maybe 15 transactions into a fund. And so if you're looking to raise 50 or $100 million in your business and their fund size is 200 million or 300 million, the math is just not going to equate. It can give you insights in terms of the size of companies that they want to invest in and also what their ownership stakes might look like in some of those investments.

[B]

Yeah, great point. I think there's some other things you can learn from that analysis. If you feel like the check size they would write in your company is either too big or too large relative to their average, that could tell you, hey, maybe they can't even get the deal done if it's too big. Right? They're just telling you what they want to hear. But if it's too small, there's also some concerns about how important might you be. And I think we're seeing a lot of that right now where some of the bigger funds are writing smaller checks just because they're unsure about the software environment. And when Things get back to normal. That may be a big negative if you're a small check for them in terms of just how important you are to them.

[C]

I think a follow up to the fund size could be narrowing in on not total assets under management, but their existing fund and then understanding how much of that fund is deployed. There's a concept of dry powder in our land where people think about how much capital they have to deploy still. So I think that could be a follow up question around fund size, around just making sure you understand are they looking to deploy that fund right now or is their fund size already fully deployed?

[B]

Also the difference between the total funds they have and that particular fund, meaning they may have raised $50 billion of capital in their lifetime, but they've deployed most of that, or that's in past funds. So sometimes they'll be creative in how they answer that. But make sure you hone in on the current fund they're investing in that size. And as you said with Dynamics, are with how much capital is left. A second question I think is a really good one to ask for founders, particularly if you're rolling a lot of equity, is how are they thinking about what their target return is and how they're going to get there? So maybe give us some insight into how that can be helpful to a founder. Jeff?

[C]

Yeah, absolutely. So I think target return can give you a sense for how do they manage their portfolio companies and what are they shooting for. It can also give you a little bit of a sense for the risk reward. Right. If they're looking for a 2x or 3x return over five years, that probably screams not very aggressive, right? Kind of passive. If they're looking for a 3 or 5x return over 3 or 5 years, they're looking for high growth, right? They're trying to create a lot of value. I think another aspect of return profiles would be understanding what that fund's historical track record of performance is. If you're rolling over a lot of equity in the transaction, all things being equal on valuation, I think you'd like to be partnering with someone who's been successful previously on transactions and getting returns for their LPs. Now, the one caveat to that I think I would say is entry points. Valuations can be really important to fund returns. And so I think you feel a little bit better if you run a competitive process, you got 20 bids, you're down to two that are basically at the same price. Then at that point, I think, understanding, okay, is there a big difference in fund returns and does that influence your decision making? I think that makes a lot of sense. If you're in a one off transaction with an investor and their fund returns are fantastic, I think you might want to question what their entry points are and is this the right valuation for the business?

[B]

It's a really great point because there's basically two ways to get a return on investment. One is you buy cheap and it's easy to get a good return. One is you pay a lot for the asset, but you go and you grow it. Maybe you expand the multiple and you exit because of the growth. I think as a founder, those are very different outcomes in terms of what you want. You'd like to get a high valuation upfront and also get a really good return on what you roll, but I think sometimes that gets lost. That's a great question. And obviously investors aren't going to tell you that they get any cheap valuations, but it is reassuring when you run a process. They also have a good return profile that's different than just getting in for cheap. That's the way a lot of real estate investors think. They kind of make their money when they make the investment.

[C]

And we've had some clients where that was one of the critical aspects of decision making at the end, particularly founders who are less interested in being involved in the transaction or the business going forward. And if they're planning to hand off the keys to someone and understanding what their return profiles have been on their investments, that's really important.

[B]

And it's complicated because if you're a founder sticking around and managing the business, obviously you want a good return, you're going to be working there, but you also want to have a lot of say in what happens with the business and frankly have quite a bit of control. If you're exiting, you may care more just about the ultimate return profile and not really how you get there. So I think it's just important to understand that difference. One question I would ask the senior folks is what role will the MD or the partner play in the relationship during and after the transaction? Jeff, maybe talk a little bit about that and some of the nuance there.

[C]

I think there's different philosophies that you'll find different PE funds have around how active they are with their portfolio companies and that could even go down to the partner levels. Right. So partners have different views on how proactive they are. So I think it depends a little bit on you as the founder, what you're looking for. Right. There's investors that'll be super Active and maybe come with a playbook a little bit in terms of what they want to see executed with their companies. You'll have other investors that are much more passive, kind of along for the ride. Depending on what you're looking for as a founder, that'll influence a lot. And then funds, depending on how large they are and how much infrastructure they have, they'll have different degrees of what they call operating partners or just operating resources. And that could cover things like sales and marketing and go to market execution, tech and product. So I think understanding what resources you'll have available to you within their portfolio and is that kind of a push pull relationship? Do they push it on you or do you have the options for it? The other thing I would say is sometimes funds will even charge for those resources. So there can be a lot of kind of T's and C's behind those resources that you might want to understand before you get into detailed diligence with an investor.

[B]

I think it's great to dig into those because 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. So I think trying to understand the value add there and really dig into that is great. One thing, when you're talking to these private equity firms, everyone's going to talk about their wins, right? The company they invested in, where the growth rocketed up and they got this great outcome. I don't think you really learn a whole lot from that. A lot of times that was just the right investment at the right time, right? They picked a good company and it was off to the races. I think where you learn a little bit more is asking them about experiences where it did not go well and kind of what that looked like. So, Jeff, maybe talk about that one a little bit, what you can learn and maybe some ways to network into some founders who have lived through that with these PE firms.

[C]

I agree with that completely. So I think trying to uncover a situation or an example of an investment that didn't go great, right, A sticky situation that they had to navigate with a founder. So I think I would encourage founders to ask for that type of reference. I think it would make sense to just understand what that experience was like with that investor because that's going to be a lot more telling in terms of how they operated under a time of stress as opposed to when everything's going well.

[B]

And one way we get some insight into that for our clients is during the process when it's really competitive we're kind of putting the buyers under a little bit of stress and strain and it's interesting to see how they react. Sometimes you see a different side of their personality come out in terms of how they engage in that. So we get a sense for that from dealing with them under the stress of a competitive process. But I think you definitely want to try and understand that upfront because hopefully everything goes well. But in a scenario where something happens in the industry or the business, you want to make sure they're there to help protect your equity value rather than just focusing on all the winners in their portfolio. So I think that's also really important to protect your downside. Another question here is around experience in your particular sector. The way a lot of PE firms will think about it. If they're not sector specialists, they're looking at your key SaaS metrics. How fast are you growing? What is your retention? They all want to be in those attractive businesses, but there's a lot of funds out there and you're going to be able to choose who you work with. Maybe talk about that sector experience question and why that's important.

[C]

I think you definitely want someone coming equipped with sector experience because they're going to have relationships, be able to add more value. From day one, it'll be less you educating the investor and the partner on the TAM and the go to market and why there's product market fit. Instead of that, you're going to have an investor that's really encouraging you to think outside the box in terms of different growth areas for the product and they'll just be intimately involved in the business and the industry that they'll be able to add much more value. And I think that really shows up in our processes when we get into second round diligence. When you're having meetings with investors and they're selling you a little bit.

[B]

Right.

[C]

Because it's competitive and they want to win. And so that's where you'll be able to push some of these investors. And one area that we've seen that get tested in the process is to ask for referrals or relationships. If an investor is preaching that they're going to be able to help you guys on maybe some high level introductions or some partner relationships. It's critical that you're able to put that to the test during the process and have them start to do some of that entry level facilitation of those introductions before you actually end up picking a party and moving forward.

[B]

Absolutely. And one of the risks we just think it's unacceptable for a founder to take during the process or in the late part of the process. Maybe you've picked the party and given them some period of exclusivity is what I would call market risk. The buyer doesn't understand the market, doesn't understand the tam. We see that all the time. When founders negotiate directly with private equity firms, they'll give them exclusivity, and then a month into it, the PE firm's like, oh, well, we don't like the tam, or there's something we don't like about the market dynamics. What we see in the deals that we're running is the PE firms that have a lot of experience in a sector, they already come to the table knowing that about this business and that they like the sector and want to be in it, and they just move really fast because they don't have to do all that other work. They've already done it. So if it seems like you're educating them a lot on the industry or the market, I think that's a big negative. Particularly in vertical SaaS where TAM issues crop up or maybe even just the length of the sales cycle or seasonality. If they don't come to the table understanding that A, they may not be the best partner and B, I doubt they're going to be really competitive on valuation because they'll see all that stuff as risky as opposed to, no, we understand this industry. Maybe to shift gears a little bit. A lot of times we'll have our founders ask this question of PE firms. What does the first hundred days look like after a deal closes? Maybe talk about why that's important and what you can learn from that.

[C]

That's your ability to really learn instantly, what is life going to be like under this new ownership, under this new partner? I think you'll get insights into how they think about deploying some of those resources, how they think about maybe early areas of being able to add value. So investors, once they submit the funds and it's wired, their clock starts counting on their return. Right. So I think they're going to want to get off to a fast start if there's some significant changes that they plan to make or just shifts in how the business is being operated. So I think understanding what their strategy is going to be from day one in the first couple months is really critical to make sure you're aligned with how they're thinking about that and how you want to operate the business post transaction.

[B]

Absolutely. And one final question I think is worth asking is how aggressive they want to be on M and A strategy. And with all these questions, be careful that you don't lead the witness too much because they're good at sales. They're just going to key into what they think you want to hear. But I think this is a really important one because some founders don't want to be super aggressive on the roll up strategy post deal where some see a big opportunity. So Jeff, maybe talk about how to ask that question and why that's important in terms of what life's going to be like post deal.

[C]

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. Right. And every other investment. Have they on average done three transactions post or have they done five transactions post? So I think understanding what they've done historically is really important. Fund size will also dictate to some extent their flexibility and ability to be acquisitive post transaction. So if you're at the high end of their check size, they likely aren't going to have a lot of additional capital to deploy to your transaction to that one investment because they'll just be too concentrated. So I think you'll get some early signs from just how big their fund size is and also what their historical track record has been that will lead you to have a good view on different investors. And to your point, different investors have a lot of different views on how they think about add on acquisitions. We have some investors that have literally done 20 or 30 tuck in acquisitions for a portfolio company within a matter of three or four years. So very aggressive roll up strategy. Life is very different under that type of regime and operation strategy versus keeping it independent and growing organically. So I think making sure you have alignment around what you feel like is the best and most optimal way to run the business post investment and make sure that view of the world aligns with your investor is really important.

[B]

Absolutely. And just to double underline the point you made about fund size and how that plays in their average check size is $100 million and your deal that you did with them was about $100 million of liquidity and you really want to go on a buying spree, there's a good chance that's not going to happen. Debt's a little bit more expensive. So I think I wouldn't necessarily take their word for that question. I would ask them for examples like how much did you deploy and then what were the follow on acquisitions. We just spoke with a founder recently who one of their friends picked a PE firm because they were going to do a ton of M and A, and then once the deal closed there was no M and A to do because the fund size was just too small or they had already deployed too much capital. So anyway, those fun math calculations matter a lot in terms of what they can and can't do. Today we talked a lot about how picking the right partner can be based on asking some of these key questions and really understanding that before you can getting due diligence or giving them a lot of data. I would say when you get these phone calls, particularly from private equity associates, 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 to see if you want to spend more time with them. So don't be afraid to ask questions. Try and get some of these answered. You're likely going to have more definitely think about your key interests and what you care about and find a way to dig into those. And just remember, 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 Jeff, thanks for joining us discussing these topics. Appreciate it.

[C]

Yep, absolutely.

[A]

VistaPoint Advisors is a founder focused investment bank that advises software and Internet founders through M and A and Capital raised transactions. We are a fully unconflicted investment bank who only works for founders on the sell side, so you know that we're always representing your best interests. Security is offered through VistaPoint Advisors member FINRA SIPC. This has been provided for informational purposes only. It is not intended to address the all circumstances that might arise. Testimonials from past clients may not be representative of the experience of other clients and there is no guarantee of future performance or success. Clients are not compensated for their comments. If you have any questions about the process of selling your business or raising capital, reach out to a member of our team or check out the four Founders section of our site by visiting four Founders Guide.