The key to securing venture capital

So, you're wanting to scale your business to the next level? Or, maybe you've recently launched a startup with high hopes of its success. Well, you're in luck. In this episode of The ROI Podcast, Faraz Abbasi, a partner at a private equity firm, reveals what they look for in a business before considering an investment.

Show Notes:

(The ROI Podcast Music)

Shane: Welcome back to The ROI Podcast, everybody! I hope you’re having an amazing day out there! I’m your host, Shane Simmons. I’ve got the associate dean of academic programs for the Kelley School of Business, Phil Powell next to me and we have a really cool episode. As you know, we are a few episodes into our CEO series, where we’ve been interviewing some amazing executives and figuring out what has helped them elevate their careers so they can live their best life. Well in today’s episode, we’re talking to someone who you could call a CEO to CEOs. His name is Faraz Abbasi, he’s a Kelley School graduate who’s the Senior Managing Partner at Centerfield Capital – a private equity firm in Indianapolis. And Phil, I know you’ve known Faraz for some time now.

Phil: Absolutely. I knew Faraz as a student in the Evening MBA Program. During the program, he made a decision that he wanted to go into private equity, and to make that jump, he contacted Centerfield Capital to volunteer his time. And now he finds himself as a managing partner. He's been very successful. It's a classic example of going after what you want to do. Now he finds himself making investment decisions in new businesses. So, he brings a lot of wisdom and I'm glad we could have him in our episode today. I started my chat with Faraz talking about the factors that determine whether or not a venture fund chooses to invest in a company.

Faraz: So the common sentence in our industry is we’re investing in management, not in the company necessarily - the management team holds the most critical component of our investment thesis. The most important point I would make is when management teams have a strong track record and put skin in the game. We’ve done a ton of analysis over 18 years where we’ve looked at what has worked for us and what hasn’t. The one thing which sticks out is when the management team has skin in the game – they’re re-investing their capital, they take some chips off the table, and for the first time, they’re becoming investors in the company.

Phil: So Faraz says the management team needs to be engaged and have skin in the game – which he says is when they are re-investing their capital in the company. But Faraz makes it clear – that many firms, before investing in a company – are looking at the first impression they get from the CEO.

Faraz: When we go into a management presentation where a management team is presenting to us an investment opportunity, if several people are on their cellphones, we walk out – we try to wrap the meeting up pretty quick. If they’re not fully engaged with the conversation, [that’s not good].

Faraz: In terms of other things with management, if they’re not engaged and it’s a team where we feel one person is talking during the whole management presentation and the rest aren’t participating, that’s a big red flag as well. This person leading the organization must be a control freak, he’s one that’s demanding or controlling the whole conversation. We’d like to get a chance to speak to each member of the management team and look at their management depth – again, we’re not investing in one person, we’re investing in a whole team.

Phil: So if you are out there looking for investors or venture capital – think about what Faraz just mentioned. It’s not always the idea or product that investors are looking at – they are also looking into the management. This is where you really have to sell yourself! But what about specific traits investors may look for? Here’s Faraz’s response.

Faraz: I would say the knowledge. I’ll give you a quick example, we invested in an outdoor gaming product company in Westfield, and it was a company which in the initial review didn’t pass The Smell Test because of the size – it was a smaller company, and we typically invest in companies with four million of [unintelligible] plus. Because it was local, we decided to talk to the management team and discuss the company further. Another risk has we thought it was a one-product company, mostly cornhole and beanbag games. Long story short, we went and visited the management team, spoke with them, and they really wowed us in terms of the knowledge they had.

They seemed to be not only very knowledgeable but also very partnership-driven, so we took that meeting, came back, and decided it was a company we wanted to go after and invest in.

Phil: So, to all of you business owners or executives out there looking for investors – Faraz mentions knowledge and having a partnership-driven attitude.

Faraz: That’s a big win, and the other big win is where the CEO has built such a good team that they have a strong succession plan. If they get hit by a truck, they have enough people in a place where the company will still survive and thrive without them. That, again, that bolds to a higher evaluation for that kind of businesses. It’s not common to see those kinds of CEOs in our businesses where, again, often times we augment the CEO in place already with other people where in 3-5 years the CEO will retire and the next tier of management team will take over for that reason.

Shane: So here is the lesson Faraz really wants our listeners to take away: You may have an awesome product or service, but without great executive leadership, those businesses don’t look nearly attractive in the long-term. And this is especially important if you are looking to raise capital for the business.

Phil: It's really this simple: A good venture capitalist, when she gets a business plan, first turns to the leadership bios, and if it pasts that test, then they look at the business model and the product. So it's the complete opposite of what you think. That's the way smart money follows smart opportunity. 

Shane: And as I listened to this interview, Phil, I picked up on something Faraz said and we all talked about after the interview, and that is that better executives can let go faster. Meaning, they don’t have to be involved in the day-to-day, they’ve built a strong enough team who can take care of the details, while they focus on the big picture.

Phil: If you're going to be an effective executive then you have to scale yourself. Which means you constantly have to be shedding tasks. As the chief executive officer, you're really the chief communicator.

(The ROI Podcast Music)

Shane: That’s going to do it for this episode of The ROI Podcast. We want to thank Faraz Abbasi for being on the show and giving us an inside look at what investors are looking for in leadership before investing. We will be back here next week talking about traps to avoid as an executive – and how to prevent feeling too overwhelmed. In the meantime, don’t forget to subscribe and leave The ROI Podcast a review on iTunes. Keep up with everything we’re doing! And we’ll talk to all of you next week here on The ROI Podcast!

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