The role of private equity & why bank financing isn’t ideal for startups
Startups should learn to embrace private equity for a number of things as banking institutions rarely warm up to startups. To begin with creditworthiness; most of the time, startups do not have any historical financials, as a banker you run away from such kind of businesses. Most banks want financial history, your cash flows and whether you can service a loan. This makes banks very unattractive to startups.
Even if you can afford a loan it is not patient capital in nature, you have to keep meeting your obligations and they are not very flexible. Unfortunately in healthcare most of the clients tend to be government so if you are chasing a county contract that is going to take a few months to close and once you have it, they take another few months to pay and sometimes they default depending on whether the Senate approves county budgets or not. You are at the mercy of counties while the banks are chasing you to pay your loan thus it becomes very constraining.
Private Equity and Venture Capital tend to be more flexible, especially if it is an impact-focused because this means they are even more patient. For them, it is not just about making a quick buck but it’s also about the impact. They have a triple bottom line approach. While profits are important, Impact Investors emphasize that people’s livelihood and well being should be safeguarded at all times as well as the environment.
They also understand that the target customer segment doesn’t have lots of disposable income and are willing to be patient with the entrepreneur targeting the bottom of the pyramid to build the critical mass required to be sustainable. Most impact investors will stay up to 8 years before they exit. They are also willing to open up their networks and link you up with vendors, suppliers & customers. They typically don’t take a back seat after investing but rather want to be actively involved in portfolio management.
Writing the cheque is the easiest part. Portfolio management is the real work and any investor who has a heart for impact will have a very high touch portfolio management approach. In many ways, they are more advantageous compared to traditional banking.