How to Choose the Right Growth Equity Partner

One of the most frequently asked questions I am asked by entrepreneurs of high growth, high potential companies is what should be the decision criteria that they use in picking a growth equity firm to work with.

There are hundreds of growth equity firms in the business, many of which have great track records, credentials and experiences to help a founder build an enduring company. But what might be the best criteria to judge who is the right partner for you? In working with entrepreneurs and founders for more than 25 years, I wanted to provide my best independent thinking on how to pick an investment partner.

1. Pick the people not the firm. You are making an intensely personal decision.  When you have a critical decision to make, is the lead partner going to be someone you absolutely trust and someone that will provide incredible judgement and perspective.  Will they challenge you in constructive ways or just tell you what you want to hear?  Focus on empathy, scar tissue and humility. Great investors have this in substance. Find someone who likes to take risk. Importantly, don’t get enamored by brand.  Everyone has a list of marquee companies they invested in. Logos and brand reputations don’t win customers or make your team better-people do.

2. Focus on operating acumen. Professional investors are not operators and have limited company building skills.  They rely on pattern recognition, playbooks and other heuristics that just don't lead to a special company.  You want anomaly. The valued judgement you want next to you comes from individuals who have built highly successful, market leading companies.  These operators know uniquely how hard it is to build a company… a professional investor does not.‍

3. Deep domain expertise in your end market. Pick an investment firm and an individual that really understands the specifics of your market, products and competitive framework and is going to bring creative ideas and perspectives. Picking an individual that does not have significant years of experience in your domain is not going to result in a relationship which you are going to find beneficial. Ask yourself if the lead partner brings perspectives and ideas that are additive and different from the way in which you think.  Do they offer truly unique ideas and ways of thinking or simply serve as a private equity “echo chamber”?  It is critical to pressure test the substance of this relationship… Everyone sounds good in a first and second meeting, but can they really go the distance and have the substance to be a thought leader to you and your team? Make your potential partner take you through a detailed diagnostic of their perspectives on the market, your team, the product roadmap, how to build the go to market organization and to outline in detail what they think you should be doing differently to build an enduring company.‍

4. Avoid firms that grind you on the numbers. In high growth, category creating companies, it’s all about product, market fit, customer success, creative marketing and sales execution.  I have always believed that the numbers are never more than 30% of the answer.  Growth equity firms that spend all their time beating you on numbers will not help you build a leading company. Find a firm that will focus on that what matters.

5. Don’t tell me how you bring value, show me. Has the firm already demonstrated to you that they can bring value?  I always encourage founders and entrepreneurs to develop relationships with investment firms years prior to when they will need money for this exact reason. Have they brought great ideas on competitive and customer intelligence? As you build out your team, have they surfaced specific candidates to fill your C-level requirements? Have they done a diagnostic on your go to market efforts? Helped you think about pricing and packaging? Channel partner ideas and relationships?  Customer connections? M&A ideas? Global expansion opportunities? These are all good areas to pressure test the operating capabilities of your investment partner.

6. Is my company really important to you? Ask the question how many investments does your firm make each year?  How many boards are you on today? How do I know that I will get your time, effort and attention? These are the most important questions to ask. If you pick a firm that does more than 6 or 7  investments a year, the likelihood that you will get their best resources is extremely low. Focus on a firm that cares about your success and for whom your success is economically significant to the firm. It is the only thing that assures you that they will commit the time and resources needed to helping you be successful.

7. Is the size of the investment consistent with the firms overall strategy? If you want a partner to bring real value, it has to be a meaningful investment for the fund.  Raising $30-100 million from a firm with a $4 billion or larger fund will not get you the real attention you may seek. Pick a firm where the investment size is consistent with what that firm is good at and will focus on…a growth equity investment firm that will deliver on value add will not have more 15 companies in any given fund.  At a growth equity investment firm, partners spend 50% of the time looking at new investments and 50% of their time working on portfolio companies….this means that the core team you are working with should not have more than 3-4 board seats…any more than this and you are not likely to get the help you may seek.

8. Empathy, scar tissue and humility are leading characteristics that you should be looking for. Every founder led company has a unique culture that is critical for a founder to maintain and build over time. Picking an investment firm that understands the uniqueness of what you’ve created and how hard you have worked to build a special company and demonstrates a grounded, humble approach to the way in which they will work with you is critical to a successful relationship.  Take the time to speak with other founders that your potential partner has invested with and ask the specific questions about how good a partner they have been in difficult moments.It’s also critical to speak with the founders of companies that have not been successful investments…this is the true test of your partners worth.

9. Pressure test how they might react based on the circumstances of how your company evolves. Are they prepared to support the operating loss that you want to run at in order to sustain or enhance your growth rate? As your growth rate slows down what pressure will they put on you to drive for higher levels of profitability and are you prepared to embrace such?  Will they support your desire to invest in new products and markets? It is critical to find a firm that will support your growth aspirations as well as the operating losses required to achieve the potential of the company you seek to build. Some investment firms support a growth at any cost mentality, while others are much more well suited for more moderate burn to achieve desired growth. Understanding the risk tolerances of your partner is a critical component of your decision.

Final Thought

Picking a growth equity partner is as personal as hiring a co-founder. Take your time, engage deeply, and pressure-test the relationship. The right partner will not only write a check—they’ll help you write the next chapter of your company’s story.

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