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2012 DSA Annual Meeting Speech

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Why Venture Capital & Private Equity Are Investing In Direct Selling

In a CEO-only Investor Forum at the 2012 DSA Annual Meeting, we heard from a few experts what private equity and venture capital investors look for in a direct selling company's metrics, milestones, size and profitability. They also told us why they are investing. 

Here are some of the comments from Frank Schiff (pictured left), managing director at MidOcean Partners, which invested in Legal Shield, a direct selling company.  Frank represented the private equity interests. 

 First, private equity is looking for companies in the hundreds of millions of dollars that deliver on a compelling value proposition.  They look for the most experienced, not necessarily the smartest, people in the industry. 

The company must have:

  • a unique business model
  • a strong barrier to entry
  • predictable and recurring revenue
  • good internal systems & practices
  • an attractive valuation 

A company has to be well out of the angel and venture capital investment stage for private equity to be interested.

Investing goals of vc's, however, are different.  They expect the company to use their funds to grow.  They represent a minority  share of the company, and they are not necessarily expecting cash flow, but growth that will lead to it.  They are expecting time to liquidity to be from 5-10 years.  

Jason Stoffer, a Partner at Maveron LLC (co-founded by Howard Schulz), explained it this way: "we invest in small, starting out companies, and we are looking to find the next Silpada.  Private equity looks for consistency, venture capital looks for hyper growth." 

He pointed out that since 2001, over 11 direct selling companies went from $0 to $100+ million in sales. There are favorable macro trends that point to the viability of direct sales as a channel.  In a time of structural unemployment, it is easier to recruit, especially as a supplemental income when the family has lost one earner.  Things like technology have changed the game: the iPad has changed the ordering experience, owning customer data has led to more repeat purchases and social media is a powerful recruiting and brandbuilding tool.  In addition, the need for social interaction in an online world makes direct selling an attractive model.

"We look for great founders, who are really passionate about the business first and early on," Jason emphasized.  They must be "entrepreneurs looking to create the next $1billion brand."  But he warns founders to be careful what they wish for.  Do you really want to sell?  If not, don't look for venture capital.  This is why his firm does a psychological assessment process with the owners, and they take 4-6 months to get to know them.

Whatever stage a startup is in, it is hard to predict success.  Just because all or most of the factors are present, does not mean this new venture will be successful.  Many factors come into play in the myriad of decisions of who to hire, and where and when to spend money.  There are no guarantees that the stars will align and produce the necessary momentum to produce the next billion dollar brand.  But it is surely happening somewhere as we read this.

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