Thursday, February 09, 2006

For the last 16 years I have been involved in virtually every aspect of the private equity markets, from helping companies raise money, to investing from my own account, to managing pools of institutional capital, to guiding private companies from their boards of directors, to helping companies find suitable exits. My hope for this blog is that people who have interest in the field of private equity will feel comfortable asking me questions or raising topics that will help both of us learn. The private equity markets are constantly evolving and if I can learn a few things from this audience, source a few deals, help an entrepreneur succeed, or provide a cautionary tale, then this effort will be a success. Let me know how I can help.

For additional information, I was recently interviewed at http:/

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Blogger TV CFO said...

Hi Bob,

I'm the CFO of a television development and production company. We have two shows that have already been put into development by Touchstone Television, one of which has already been sold to ABC. We're also developing some short-form videos for Yahoo.

We're in the middle of our B Round. It's a $5 million offering of preferred shares. We placed the A Round without much difficulty to high net-worth individuals. We thought this round would be VCs, but after talking to 20 firms, and meeting with five, we're getting no real traction. The offering really doesn't fit into anyone's basket, largely because of industry.

So my question is, where in the VC universe should I take this kind of company, if anywhere?

Thanks in advance for your answer.


5:14 PM  
Blogger Bob Crants said...

Paul- sadly, I do not have an easy answer to your inquiry. You are correct that the venture capital community as a general rule has stayed away from the mainstream media businesses due to concerns about the boom-or-bust nature of the business, latent fears about accounting concerns in the space, and the dependence in many cases on individual writers or members of management. We have not participated in this space ourselves though we have been approached on a few occasions, and as such don't really have a natural place to send you. One of the highest profile participants in the media space also has a merchant banking subsidiary that may be able to be helpful to you, at least to provide you additional guidance. Their firm name is Veronis Suhler Stevenson and their website is Sorry I can't be more helpful at this point, but if I come across other potential candidates for you I will be happy to post again. Best wishes, Bob

1:37 PM  
Blogger aspiringVentureCapitalist said...

Hey Bob,

I read your interview at Thanks for starting this blog. I want to become a venture capitalist and learn to invest. I just graduated from college, and soon to start as an investment banking analyst.

I read your reply to TV CFO, your explanations for the reasons that VCs avoid media business were excellent. I wanted to ask you what other general sectors you at Pharos (and VC in general) avoid and why?

6:24 PM  
Blogger Bob Crants said...

Aspiring Venture Capitalist- every firm looks at industries differently, and approaches really depend a lot on the stage at which the firms' invest. Rather than speaking too broadly therefore, I will respond with general comments about Pharos. As a general rule we will steer clear of businesses that dont have pricing power. While this may seem obvious, large segments of the economy are dedicated to products or services that are commodity-like in their nature, including transportation, agriculture, wholesale trade, food retailers, etc. and large segments of the energy and telecom markets as well. While there are a lot of good businesses in these sectors, success will be determined more by cost controls, unique processes, management and execution than about anything truly proprietary. Specifically, in a commodity business, your success is determined not only by your own execution, but also by your competitors failing to adapt. We are not usually willing to make those bets. Another way we look at commodity businesses is simply by looking at margins. If a company presents us with a business plan that indicates a gross margin on their product or service that is less than 20%, we will always be very aggressive in our questioning about their ability to raise price. If the answers revolve around `market prices' or that the company would `lose share' if they changed, then it is not a business for us. While I dont feel like I have necessarily given you exactly what you asked for, and I am sure that a lot of CEOs would be offended by my comments, I can flesh out these ideas further if you have follow-up questions.

Away from commodity or low-margin businesses, we try to steer away from businesses that are easily outsourced to lower-cost venues, because we believe that is an irreversible trend. We try not to get involvesd in businesses that have heavy capex requirements (companies building factories etc.) unless there is strong business protection associated with regulation or intellectual property. Finally we try to avoid businesses that we dont understand- as an example there are large segments of the biotech space that are simply too complex for us to analyze in house. Once we make an assessment that we can't understand it, and are going to have to rely on a third party for analysis, it is very unlikely that we would conclude that we could really bring much value to the company. If we cant bring value, we also probably cant fix a problem if it arises, and therefore it is probably not a deal for us. Thanks for your interest in Pharos and let me know when you move from aspiring venture capitalist to active venture capitalist. Bob

4:33 PM  
Blogger aspiringVentureCapitalist said...


Thank you for answering my question. Your explanations are very thorough and make a lot of sense. Clearer than some of the VC books I read. I had a few follow on questions:

1) How did Pharos come to a decision to invest in ReelFX? It seems that it has the same potential problems that you mentioned to tv_cfo. How do you protect yourself in such an investment? If say, half of the creative team leaves to a competitor, or some senior relationship person takes all big customer accounts to a competitor?

Personal: I am about to start an internship with an early stage VC firm, before my job as a technology investment banking analyst starts in July. I am really interested in getting a job in VC after my 2 years at my bank. I wanted to ask you what should I strive to do at during my 1.5 month VC internship to make myself more marketable to VCs in 2 years. In other words, I have opportunity to go to board meetings, and ask for specific work assignments. What would you concentrate on learning?

7:43 PM  
Blogger Bob Crants said...

Aspiring- ReelFX was a very unique situation for us the company actually has a stable business with good margins providing animation services to a few industries including outsourced animation for feature films and animation for advertisements. Secondly they have a growing direct-to-home animated content business which is much less cyclical or hit-driven than the traditional animated feature film business. As such, the risk associated with the hit-driven, creative-content driven, film business is meaningfully diversified and therefore less of a factor than may appear on the surface. We liked the balance of the businesses and diversification in combination with some the compelling upside potential of the more hit-driven animation businesses.

As for your internship and experience- I would try to learn whatever you can about financial modeling, as the skill of building models will apply to virtually any part of the private equity business. Secondly, I would read as many business plans as you can, and sit-in on the meetings where they are discussed with the investment team. Understanding the delicate balance of risk and return is what private investing is all about, and the discussion of actual business plans is a much better way to learn than the theoretical risks you learn about in school.

1:27 PM  
Blogger Joseph Wargo said...

Deal Originator - I would like to originate deals for VCs and others in excess of $1 million. Obviously, I expect to collect a fee upon funding.

My question is:
What is the best way to contact potential funding sources with the understanding that I can bring them VIABLE deals?

2:26 PM  
Blogger Bob Crants said...

Deal Originator- many private equity and venture capital firms will only pursue deals that they source themselves, but most rely on their in house expertise at deal evaluation. For those that think of themselves as deal evaluators, seeing more deals is better than seeing fewer deals. The easiest thing to do is to sign up the companies themselves to agree to pay you a fee if you raise them capital. If they refuse to do so for some reason, then approaching the private equity firms with a concrete proposal, such as a flat fee of $50,000 if the firm decides to invest and invest at least $3MM; or a flat 1% fee on dollars invested. Most will say no, but if you have a teaser that describes the business opportunity in broad terms, and you have done your homework on which firms are likely to be interested, you may get lucky. Finally, it is worth noting that credibility means a lot in the private equity business. It may make sense for you to provide lists of references of companies that you have placed with VC's, and if you don't have any, then source one for a private equity firm for free in order to establish a relationship and to create a reference. Good luck in your pursuit. Bob

6:24 AM  
Blogger Mari said...

Hi Bob,

Could you pls explain the fundraising process and content of memorandum for PE company. Besides, I could not find any examples of placement momerandum in the internet. Maybe they are not publicly available.

Thanks a lot,

3:24 AM  
Blogger Ray said...

Hi Bob,

I am a young professional and Goldman Sachs alumnus. I came across your firm while doing some research on the Urban Investment Group as you made a co-investment in MCCI Holdings. I am mulling over a few business ideas and wanted to get your input.

My question for you is: how easy/difficult is it to find PE targets that you pursue? And what sources do you rely on most heavily to find these targets? Is it your professional/personal networks, tools like Capital IQ? Do private equity firms use services akin to headhunting firms to source deals?

Do you think PE firms would pay to have access to a searchable professional network of high quality entrepreneurial firms?


7:04 AM  

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