10 Private Equity Questions You’ll Need to Ask Before Choosing a Partner

You may have all kinds of private equity questions as a start-up founder. Private equity firms raise money from institutional and accredited investors and invest the funds in assets like start-ups, and in many start-up stories, getting that “funding” is the first step to growth and long-term success. It’s fair to wonder if that’s the right path for your cybersecurity company, and if it is, how the relationship would work with the investors you choose.

The type of private equity firm you seek will depend on where you are as a company and what you wish to achieve in the future. You’ll want to partner with someone that fits your organizational outlook. This guide will take you through a list of questions to ask that will help reveal the kind of relationship you’re getting into before choosing a private equity partner for your cybersecurity business. 

Types of Private Equity Funding

You should learn a bit about the various forms of private equity funding before speaking with firms in the industry. Going through this process ensures you don’t waste your time talking to investors that won’t provide the type of funding or relationship you’re looking to acquire. 

Leveraged Buyouts

Some private equity firms deal with leveraged buyouts. They buy a distressed company, improve its overall financial health, and sell it for a profit. Only consider this type of private equity firm if you’re looking to sell your business right away even if it’s for minimal value.

Distressed Funding

Businesses in severe financial trouble with underperforming assets could seek distressed funding through a private equity firm. Many companies that go through this process have filed under Chapter 11 bankruptcy and are looking for any way possible to stay afloat. Only go through this process if you feel like your company won’t survive without an influx of capital and are willing to risk the firm selling off your assets.

Funding Other Funds

There are situations where private equity firms will provide money to mutual or hedge funds. The goal is to create a return for investors who can’t afford the minimum capital required to invest in those entities. 

Real Estate Private Equity

Real estate private equity is another format that doesn’t benefit firms looking for funding but acts as a vehicle for investors to get involved in commercial real estate. CRE has significant upfront costs for investors, but private equity funds can pool resources to eliminate some barriers to entry.

Venture Capital

Venture capital firms provide funding to start-ups, entrepreneurs, and established businesses, depending on their needs. Investors place money in the private equity firm, which then invests in companies that need cash to get their business started or reach the next level. Types of venture capital funding include seed financing for new start-ups, early-stage financing for young companies ready to grow, and Series A financing for when the business is ready to compete in the market.

Cybersecurity companies looking to raise funds to develop products or improve their existing offering will often seek venture capital funding. There are many venture capital firms, so research the providers who invest in your spaces and ask as many questions as possible before you get into real negotiations.

a company interviewing a potential private equity partner

10 Vital Questions to Ask Your Private Equity Partner

Any private equity partner you take on will significantly influence the future of your company. Choosing the wrong partner could leave the business with long-term issues. You should ask every potential partner a series of questions before you begin:

1. Will You Provide References?

Begin by asking potential private equity partners to provide references. These reference checks allow you to speak with other companies that the firm has worked with previously to gauge their experiences. These references will help you determine if that firm might be a good fit for your organization.

2. Do I Keep Control of Decision-Making?

Some private equity firms might want additional input over your decision-making processes after supplying capital, while others are fine sitting in the background, assuming you provide an actionable plan. You’ll want to ask how involved their board will be in your decisions. Your comfort level with a highly involved private equity firm could be a determining factor in your final investor selection.

3. How Often Will We Communicate?

You’ll need to communicate with your private equity partner frequently, even if they don’t want significant decision-making input. Some firms will want formal communication on a set schedule, while others prefer informal periodic updates on your progress. Knowing what your partner expects for communication will ensure there aren’t any surprises.

4. What’s Your Track Record With Similar-Sized Companies?

It’s a good idea to examine the private equity firm’s successes with organizations the same size as yours. The needs of small, medium, and large businesses are different, so ensuring your partner has experience helping similar companies makes it more likely the agreement will be a success. 

5. Have You Worked With Cybersecurity Firms Before?

This industry has unique challenges, so partnering with a private equity firm with experience in the space can lead to a better overall experience. Cybersecurity moves quickly, and opportunities can arise rapidly on your end. Partnering with a firm that understands these unique challenges and is willing to invest in unexpected opportunities could eliminate barriers to your success. 

6. Do You Offer Anything Beyond Capital?

Money is the main thing you’ll need from your private equity partner, but it’s also recommended that you ask about any value-added tools that might be available to you. Assistance with strategic planning, business development, negotiations, acquisitions, and management recruitment could be incredibly valuable as you expand and scale moving forward. Some private equity firms are perfectly willing to provide these add-ons.

7. Who Will I Be Working With?

Ask about who you’ll be working with throughout the investment process. You might want to meet the actual members of the private equity firm’s team you’ll be communicating with to ensure it’s a good fit, too. Ask how much authority your primary contact within the firm has because that will influence how quickly they make decisions in the future.

8. Is There a Fund?

Some private equity firms have a committed fund while others raise money on an as-needed basis. Ask potential partners how they operate because a private equity fund ensures capital is available quickly if you need it for things like new equipment or emergency support. Firms that raise money deal-by-deal must go to their investors for additional capital, which could be a slow process.

9. What Are the Firm’s Priorities?

The private equity firm you select will want to make money on this deal. They might push you to acquire other businesses, scale, or exit, depending on how they feel they will best achieve their goals. You’ll want to ask about your partner’s plan before getting started, so you aren’t blindsided by what they want you to do later on.

10. What Does the Exit Transaction Look Like?

Every partnership eventually comes to an end, so you’ll want to ask about the exit transaction. The investors will want to realize their gains, and this transaction can take various forms depending on how the private equity firm operates. Ask questions about how this transaction will work and speak with other companies about how the exit transaction affected their business, too.

Receiving answers to these private equity questions before selecting a partner will give you a clearer picture of how the process will work and help you make the right decision. Don’t hesitate to ask about anything else you want to know, either. Any private equity firm you partner with is likely to be with your business for a long time, and the success of that partnership will have a large bearing on the success of your business. The good news is that most firms are pretty open with their answers and will help you form a solid idea of what it’s like to work with them. 

Find a Private Equity Firm With Cybersecurity Experience

Cyberattacks are becoming increasingly common, and this trend is opening up new opportunities for companies in the cybersecurity industry. Funding remains necessary, though, which is a service a solid private equity firm can provide. Selecting a firm with experience working with companies in the cybersecurity industry is crucial because they know how quickly the industry moves and can provide the necessary support throughout the process. 

Option3Ventures offers private equity funding to organizations within the cybersecurity industry. Our team works closely with investors, start-ups, entrepreneurs, and established companies in the field, providing growth opportunities through our private equity funds. Contact Option3Ventures today for more information on growing your cybersecurity company or tips about cybersecurity investing.

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