Firm owners who have achieved scale and made a name for themselves are all too familiar with the inbound solicitation email from investors expressing an interest in their company.  We don’t envy the inbox of such founders of service firms, nor the exercise of winnowing the field down to those with whom they might engage further…but we can help.   

To start, you should know how investors find you in the first place, because if you want to be found, then you should make sure you are well represented across the most common sources of private company information:

• • Subscription databases (e.g. SourceScrub, Pitchbook)
  • Fast growth or other accolade-driven lists
  • Industry conference attendance lists
  • Articles featuring your business
  • LinkedIn

Because your company is private, an investor must rely on context clues to reveal whether your business is of sufficient scale/sophistication to merit outreach.  Such clues include details like (i) how you describe your service offering and practice areas, (ii) industry verticalization, (iii) employee headcount & growth, (iv) schools from which your company recruits, (v) the prevalence of advanced degrees and/or certifications within your team, (vi) trade association leadership positions, or (vii) third-party validated content authorship.  We also know whether you have received capital from other sources and whether that capital purchased a controlling stake.

When you receive the inevitable inbound – and many founders of service firms report receiving dozens per week – you need to first understand the type of investors you are dealing with. To start, are they a generalist or a specialist?  Generalist investors are those who have yet to declare a major, so to speak. They go broad across the sectors that they consider and may even know enough to be dangerous in your industry. It’s best to think of them like you would a general practitioner doctor.  

Specialists are those who focus very narrowly on a small subset of industries and are highly attuned to the trends, KPIs, competitive landscape, and vocabulary of their chosen areas.  Using the healthcare analogy, compare these investors to specialist surgeons who do one or two things very well. A specialist will speak fluently in the language of your industry and will be able to readily point to other deals they’ve done that look like your business. It’s typically a better use of time to interface with specialists who are already up to speed.  

Ok, let’s now examine the anatomy of an inbound email which can be broken into 4 parts:

1. 1. Salutation.  If any of the following things occur, you can delete, disregard, or deliberate on whether to respond to the email:

1. • They haven’t taken the time to research your (or your company’s) name and include it in the greeting.  Or, even worse, they use the wrong name!
   • The name field is of a different color, font, font size or otherwise gives away the fact that you are (i) being emailed from a list, and (ii) they aren’t savvy enough to use proper marketing technology.
   • They use the long-form version of your name when you never go by the long-form version of your name (e.g. Michael / Mike).

2. Firm Overview / Credentials. This is where the suitor will describe their firm and present the case for you to engage with them.  Here’s what you want to see here:

• • A succinct firm description that avoids, at all costs, any insider private equity speak.  Is there anything more nauseating than when a stranger drops terms like “capital structure” or “multiple arbitrage” in an intro email?
  • Reference to other companies in which they’ve invested with which you are familiar and/or respect
  • More sophisticated investors will take the time to enumerate why they reached out to you, specifically. The extra time required to craft this rationale demonstrates that they are interested.  Remember the words of Peter Drucker, “The most important thing in communication is hearing what isn’t said.”

3. The Ask.  All inbounds are requesting your time, and this is where you get to decide if or how to engage.  Your options are:

• • Accept
  • Decline
  • *Ignore*
  • Qualify

4. *Follow-Up*. From experience, we know that founders don’t often respond to the first inquiry (or the second).  So, the follow-up email is an essential component of generating a response.  When the follow-up email arrives, if you see anything that references “unsubscribing”, then it might be wise to be skeptical.  Likewise, if any of the follow-up email content is something that could have been cut/pasted many times over, then it probably has been. 

If you’re not sure about how to proceed, then simply cut / paste the following questions into a reply email:

• • What are your upper / lower Revenue and EBITDA thresholds for a new platform investment?
  • Do you prefer organic growth or growth via M&A?
  • What is your current fund size and when was it raised?
  • How much equity do you invest per deal?
  • How much debt do you use in your transactions in terms of a multiple of EBITDA?
  • How much retained ownership (“rollover equity”) do you like to see from a founder / management team?
  • What is your typical investment horizon?
  • What investments (former / current) have you made in my industry?

These “knockout” questions are designed to push suitors towards greater disclosure, so that you can eliminate any wasted time from tire kickers or those whose criteria or approach diverges from your needs.

If, and only if, an investor makes it through your filter, the next step is almost always an introductory Zoom call of varying length, though typically 30-45 minutes. Just remember, a pre-requisite to agreeing to a Zoom conversation is not that you need capital.  If you are within 24 months of a transaction, it can be a very good use of time to begin developing relationships with credibly interested parties so that you are not meeting investors for the first time when you do need capital.  Taking on a partner is almost guaranteed to be a stressful exercise, and working with familiar faces can make for a more transparent, informed, trusting, and successful experience. As important, you need repeat interactions and relationship longevity to determine whether an investor is likely to add value to your business.

We hope this guide can help you to screen inquiries from interested parties. Please reach out if you want to chat through questions that you might ask to qualify investors seeking introductory conversations.  We’re also happy, on a 1×1 basis, to provide a peek behind the curtain with the data surrounding private equity email campaigns.

About RLH Equity Partners

RLH is a private equity firm with over 40 years of experience investing in high-growth, founder-owned services firms.  Our strategy is marked by a heightened focus on culture, founder leadership continuity, an emphasis on organic growth and a conservative approach to the use of debt.  In seeking to build relationships with founders of distinctive services firms we employ a proactive, email driven strategy as part of our new investment sourcing strategy.  This effort is rooted in data to relentlessly identify best practices for driving new connections and informs the commentary above.  Get in touch if you’ve received an inbound investor inquiry and want to be further armed with some questions to ask!