Introduction

Should I stay or should I go? British Punk Rockers ‘The Clash’ weren’t the first to pose that question and surely won’t be the last. And as you consider an exit of the company you’ve founded and built, you may be pondering the same question. If you are leaning toward cashing in your chips and moving on, you’ll be thinking ‘strategic buyer’ who will purchase your company based on the value you’ve built and not retain you or the management. If you say ‘stay,’ you’ll be thinking about the private equity route. But with private equity on the rise – especially in California where the region saw an all-time high of 626 deals completed in 2015, up 22% from just two years prior (source: PitchBook, 2016), and in IT which accounted for 27% of all PE activity in 2015 – your choice of private equity firms is ever-increasing. So how do you choose a PE firm that you, your team, and your customers can live with?

Lotus Innovations’ founders each have direct experience starting, building and exiting their own technology companies. It was from that experience that they saw a need within private equity to approach growth differently; a need to provide higher yields both for their investors and for their clients. Ultimately, they created a unique approach to private equity that serves the needs of exiting owners and CEOs as well as investors. The tenants of the Lotus Innovations philosophy are outlined below to help you in comparing our approach to that of other PE funds.

Tenet 1: Efficiency

There are a number of types of PE firms out there and they can vary wildly in the length of time they are willing to invest in your growth – and as a result, pay dividends. There are five-year, seven-year and ten-year funds and even a few 20-year funds, though not as prevalent in the technology arena. If you have been building your company for two, three, or even five years already, you have to think about how long you are willing to wait for the next exit if you remain with the company.

Lotus Innovations’ inaugural Fund I, was a five-year fund that delivered an estimated 33% IRR in only two years. That fund, which was oversubscribed in its first three months of fundraising, completed three successful acquisitions in under six months. By embedding experienced technology, business leadership, and providing core infrastructure support, Lotus aims to dramatically shorten the transformation cycle of its portfolio companies. Lotus Fund II has a similar structure.

Tenet 2: Focus

Up until recently, venture capital was the darling of the tech market with its deep-pocketed investors laying down capital on high-stakes start-ups with big valuations. This hands-off approach paid out once ideas crossed the chasm into sellable product. But venture capital investing in high tech is showing sharp declines. According to Thompson Reuters and the National Venture Capital Association’s Fundraising Report, the $3.3 billion in venture capital raised in the third quarter of 2015 was 33% less than what they raised in the same quarter the previous year. This decline, in part, is due to focusing less on valuations and more on operational efficiency and returns. Meanwhile, the private equity market continues to expand with LPs still feeling bullish about returns. A survey conducted by Preqin in late 2015 found that 35% of LPs who participated said the performance of their PE portfolios that year had surpassed their expectations. More than 90% said they intended to maintain or increase their allocations in PE in the coming year. But in the highly competitive PE market, LPs look to GPs who have a proven track record and a clear focus on their sweet spot.

Lotus Innovations invests in a specific area because we know it well and can see, and extract potential. Our sweet spot is technology services and software. It’s in our DNA. We vet companies that offer stellar customer experience, creative problem solving, and smart services to their clients. Some particular areas we look at include data services, voice services, enterprise software, big data analytics and cloud-based solutions. We pay special attention to companies who have built a business servicing and supporting voice and data infrastructures for Fortune 1000 and communication service provider organizations.

Tenet 3: Shared Services

As any owner or CEO of a fledgling company knows, one of biggest distractions when growing a company can be core business operations. As customers are added and employees come on board, complexities compound. How can we keep our network up and running? Are we following finance and accounting rules? How can we meet our employee benefits needs? How can we generate more leads? It’s enough distraction to hold back even the best companies.

Our founders experienced this first-hand as they scaled their own businesses. As a result, they decided to build operational and infrastructure support into the Lotus Innovations model. From acquisition through exit, a team of experts in the fields of Finance, HR, IT, Legal and Marketing works with our clients to build their business and their customer base. In short, Lotus Shared Services helps clients move from distracted to dynamic.

Tenet 4: Team Culture

The benefits of a strong sense of team and culture have been scientifically proven. In fact, in The Culture Cycle, Prof. James L. Heskett wrote that 20-30% of the differential in corporate performance can be attributed to effective vs. culturally unremarkable competitors. Typically during the due diligence phase of an acquisition, cultural fit and cultural mismatch become clear. But in this type of business arrangement, there must be a cultural fit. Some say that it’s easier to fix a declining business than it is to change a person’s attitude, work style, or cultural philosophy.

Lotus Innovations has an open, transparent culture. The Shared Services team is in lock step with the client as are the managing directors and even the Lotus advisory board. We believe in open communication and honest problem solving.

Always Be Preparing

The best advice if you’re an owner or CEO thinking about an exit, is to always be preparing for an exit. While you’re operating your business and evaluating potential PE partners, add these two tasks – at a minimum- to your daily operations:

  1. Start building a data room
    It doesn’t have to be sophisticated, it just need to be organized and maintained and contain all the necessary documents across every part of your business.
  2. Clone yourself with process
    Take the time to put processes in place that build on what you’ve done so that your prospective buyer sees that what he’s investing in is the business that you’ve built; whether you stay or you go.

About Lotus Innovations

The Lotus Innovations Fund™, located in Southern California, is a private equity fund that builds wealth for its investors by acquiring, transforming, and exiting high-potential, small to mid-size technology companies that serve large enterprise customers in enterprise IT and telecom. Our proprietary Lotus Methodology™ provides shared services support including Finance, HR, IT, Legal and Marketing; instant business infrastructure that takes a growing business from distracted to dynamic. Our founders, board of directors, and strategic advisors bring over six decades of experience in high-tech, finance, sales, and operations to help grow our Portfolio Companies and build wealth for our investors.

For more information about Lotus Innovations, please contact us.