Jeff Eisenberg: what is it like working with venture capitalists?

Venture Capital funds (or VCs ) own many rental companies in the IRN 100, including Loxam, Algeco, and Coates. Especially in today's turbulent times, with valuations of very solid rental companies on stock exchanges wildly moving up and down, a Venture Capital investor can provide long term stability and investment and know how.

But what is it like to live with a VC, especially for a rental company which was previously privately or family owned?

Venture Capitalists come in all sizes and shapes and behaviours. My own experience at Universal Aerial Platforms in the UK and Spain was at one extreme of the scale, an example of a very "hands off" and passive investor. 3i, which for several years was the biggest Venture Capital fund in Europe, had been a shareholder in Universal for over a decade. Unusually, 3i had a minority of the shares of the business, around 30%. Its contract only required Universal to provide financial information once a year. For years 3i never sent anyone to the board meetings, even though they had the right to nominate a director.

Now most Venture Capitalists, including 3i, have more standard arrangements and a great deal more control than they may have required in the past. Normally the Venture Capitalist controls:

• Approval the business plan (usually annually)
• Selection of the company's directors (usually controlling a majority of the board)
• Approval investments over a certain amount
• Setting the maximum debt level of the company
• Deciding when and how to sell the company (or float on a stock market)

Control and assistance

In the best of circumstances, the VC will bring a great deal of experience to the table. In equipment rental, they may bring financial management skills, customer contacts, operational skills, banking relationships, and experience with other lines of business, which may alone be a compelling reason for a partnership. I have seen an example where a Venture Capitalist was able to provide a new depot site for a rental company as the VC also happened to own a property development company.

In the worst of circumstances, the VC's "new investments team" charms, wines and dines the management team until they sign a shareholders agreement, then go off to find new potential investments. The management team finds they are then stuck with a grumpy non-executive director who knows nothing about the company or industry. The grumpy non-executive director constantly asks the management team to provide obscure detailed information that is not relevant to the management of the company, rather than focusing on what the company needs.

The key to avoiding this is to make sure, before the contract is signed, that the management team gets to know the people they will have to deal with daily, including non executive directors and perhaps outside advisors.

Planning and forecasting

Entrepreneurial rental companies are famous for investing in equipment based on discussions with customers, company sales people, and equipment suppliers, using a combination of experience and vision. Which brand of equipment to buy? The management says experience and relationships make equipment choices clear. The VC, however, wants to see the data on average used values, disposal channels, data on maintenance and repair costs.

The company management may create and measure performance compared to a forecast, which may be quite sophisticated. The VC, however, will want to do analysis which includes forecasting headroom in working capital facilities and future covenant compliance. The VC may also want to do sensitivity analysis, "what if" forecasts that plan for events like big drops in rental prices and utilisation.

The VC may want to "gear up" and replace some of their equity investment with additional debt, especially for a rental company that is producing cash. This is quite similar to a publically traded company repurchasing its own shares (see IRN, July-August 2008). This can really boost the VCs return on equity, but probably won't make the day to day management of the company any easier. Just like in a share repurchase, distributing this cash to investors (and it is always the VC that gets their money first) may be at the expense of new equipment investment.

Board meetings and decisions

There is still a great deal of "MBA" decision making in the rental business, what I call "Management By Alcohol". Equipment is ordered during the excitement of trade shows and social events, even in the bar or the pub. Often intuition and relationships with manufacturers is used as a substitute for analysis - the best thing of course is to use analysis and relationships and intuition. Good VCs will introduce a balanced amount of structure and formality, which doesn't have to mean marathon multi-day board meetings. Some of the best non-executive directors I've worked with keep meetings extremely short and concise, but this requires discipline and preparation, rather than having a board meeting turn into a brainstorming session.

Exit strategy

The VC has almost certainly invested money with an eye on how it will get its money back, usually via a sale of the company. The valuation of the company will always be closely related to maximum cash generation from minimum debt, usually on an EBITDA multiple (see IRN, September 2006). The VC will therefore always look carefully at adding any debt, even if it leads to profitable growth, especially if a sale may happen within a year. The VC will ask questions like "can't we rent in transport service, or at least transport vehicles, to keep the debt down, even at a slightly higher cost?"

In conclusion, working with a Venture Capitalist usually means adding some degree of formality and additional control to an entrepreneurial business. A good VC, however, will bring in non-executive directors and processes that will provide a balanced amount of control, without slowing down the decision making process.

How to find out if your future VC will be difficult to deal with, or have a balanced view? Ask to be allowed speak to companies in similar industries where the VC has invested, say, two years ago. Even better, ask them to introduce you to management teams where things didn't go well a first, and they had to invest more money then originally planned - that will show you how the VC acts when under pressure!

THE AUTHOR: Jeff Eisenberg has spent over 12 years in the rental industry. He started and led Genie Financial Services in Europe, providing finance for large and small rental companies all over the world. Since 2000 he has held senior positions in a number of European rental companies, as well as his own consultancy for rental companies, financial institutions and equipment manufacturers. In July 2008 he joined Netherlands based Riwal working specifically on acquisitions, finance and international expansion. Tel: +44 7900 916933, E-mail: j.eisenberg@riwal.com