you will need to choose two or three top targets for your initial outreach. Why so few? Because reaching out to companies in a thoughtful and professional manner is time-consuming: you will need to craft a compelling initial message for each target and ensure that you follow up in an organized way. My advice is to start slow and add more deal targets only when you have fully exhausted the first few so that you are working on no more than two or three leads at any given time.
How do you contact companies? If there is no obvious way in through your firm's existing network and no possibility of a warm introduction by one of the industry experts you know, then the only way to make contact is through a cold call. Most private equity professionals feel nervous even thinking about cold calling, let alone going through with it. Unless you did door-to-door sales during your school years, you might have the same reaction to cold calling too. After all, most of us have developed a stigma toward irritating spammers and telemarketers, and none of us are in any rush to join their ranks. As humans, we also suffer from fear of rejection: when you make your first contact with managers of a company you know only through desktop research, there is a considerable chance that they will decline your request for a meeting. If they are inundated with cold calls, they might even make you feel bad about yourself for trying to solicit their attention. What then? It is good to remember that cold calling is an effective, time-tested strategy and that some private equity firms really excel at it. There are a few funds, such as TA Associates and Summit Partners, who manage to differentiate themselves in the crowded private equity middle market by pursuing prolific cold calling programs that involve making unsolicited calls to literally thousands of companies every year.5
It is certainly possible to make cold calling a success and design a more palatable process for everyone involved, even if you are the type of a person who cringes at the thought of cold calling. Below are my suggested steps to maximize a positive outcome from an unsolicited approach:
Prepare a compelling message. Review your research about the company and take note of any unique challenges that it is facing. If the owners of the company were to accept your investment, what do you think they might be using the capital for? What need do they have at an enterprise level that your fund can resolve? Once you have had an opportunity to reflect, prepare a creative and persuasive pitch that is specific to this business.
Do not call on the phone, write a letter. To maximize the success of your first contact with the company, you need to choose an approach that will make you stand out. In my view, there is no better way to do so than by sending a well-written letter that introduces your fund, demonstrates your thorough knowledge of the business, showcases your industry expertise and outlines the strategic rationale of working with your fund. The person reading the letter should immediately understand how partnering with your fund can help the company resolve its pressing needs and bring clear strategic benefits.
Approach a decision maker at the company. Make sure that you are addressing a person in a decision-making capacity, such as a shareholder, chairman or the CEO. If your deal target is a division of a large enterprise, then you need to approach the most senior person in the corporate development department.
Get the letter signed by a decision maker from your fund. You only get one chance to make the right first impression. The person reading your letter should feel that your approach is credible and made by a senior person with professional gravitas and decision-making capability. If your position lacks seniority, it is a good idea to get a senior partner from your fund to co-sign the letter as well.
Outline next steps. You need to suggest a process that will follow your approach. It might be a good idea to mention at the end of the letter that your fund would appreciate an introductory meeting and that you will follow up with a phone call in one week's time.
Attack from several angles. To make sure that your approach is successful in reaching the right person and is differentiated from those made by other parties, send your letter by registered mail or by courier. Follow up a few days later by sending your letter again via email. One week later, call the company to follow up and hopefully set up a meeting.
This detailed plan should help you stand out from other funds making unsolicited approaches that are too generic and not as well thought out as yours. In an ideal scenario, you will succeed in setting up a meeting with the company. However, in the majority of cases, things will not go exactly as you expect. The company might decline to meet or inform you that it is not for sale. Other targets will be open to a potential investment, but the timing may not match yours. Plan to approach several companies before the stars align and allow you to progress to the next step.
You should expect that maintaining contact with the prospective companies will take significant time and effort. One of the worst things you can do at this stage is fail to follow up with a potential deal target because you are distracted or busy. It is important to stay organized and take notes of the multiple touch-points you have had with each company by phone and email. If one of your deal targets is not prepared to start a dialogue with you due to a timing issue, schedule a reminder in your calendar to get back in contact with them in due course. Make sure both parties understand what next steps are discussed, follow up as agreed and never lose a promising deal prospect.
7. Go visit companies to convert deal ideas into real transactions
Now it is time to hit the road and meet companies in real life. This is the last step of the framework; however, you may find yourself having to repeat it over and over again, sometimes over a long period of time. The objective of this step is to make a strong connection with your deal target, learn more about its business and create actionable next steps that ultimately lead to a transaction. Since you have been evaluating the company only from the outside so far, it is difficult to predict where there might be vulnerabilities or mutual deal breakers. I recommend treading carefully: listen, observe, turn up your charisma to the max and be prepared to embrace your inner diplomat. It is worth keeping in mind that some of the company employees you will meet might feel anxious and uneasy about your visit, especially if they have limited experience dealing with investors. Be prepared to put them at ease.
Is there a wrong way to conduct your first meeting with the company? Yes, absolutely. In my experience, this happens when investors do not listen patiently enough to the company and prioritize their own needs over those of the deal target. For example, sometimes you just have to let the CEO veer off-topic for a period of time to avoid alienating him. Also, you have to suppress your inner desire to jump straight into clinical detail, even if you suspect potential deal breakers in these areas. As a rule, exploring recent strategic failures, asking pointed questions about the financials, or requesting a detailed data set are not appropriate actions at this stage. Stay away from sensitive topics and proprietary information, especially if you have not yet signed a confidentiality agreement. In summary, the first meeting with the company should not feel like an interrogation. It should feel like a friendly conversation between two likeminded parties forming a productive long-term partnership.
Is there a good template to follow for your first meeting with the company? Yes, absolutely. However, you need to go beyond private equity and look further afield into other areas where professional success stems from total mastery of communication and people skills. I personally found it useful to look into the field of sales. Yes, you read it right, sales. Many private equity investors are hesitant to admit that they are salespeople of their capital and value-added involvement in portfolio companies. They have to court companies, sometimes for years, to close a deal. That's not too dissimilar to what people do in sales, right? This is the logic that compelled me to investigate the techniques used by sales professionals and tone them down a few notches to make them appropriate for the more introspective field of private equity. Holmes (2007) provided a useful outline
