Five years ago, Vancouver resident and entrepreneur Charles Chang sold his business. Now, his business is all about investing in companies like the one he sold.
Chang is the founder of Lyra Growth Partners. Prior to starting Lyra in 2015, Chang was the president and founder of Vega, a brand of clean, plant-based nutritional products.
While Vega was a successful business, Chang was ready to move on to finding exciting new entrepreneurial companies and investing in their growth. So Chang sold Vega to WhiteWave Foods for US$550 million.
Over the last five years, Chang has learned a lot about what makes a company attractive to potential buyers.
Lyra is a growth equity investor, meaning it invests in companies that grow rapidly. If a company shows the potential to be attractive to buyers, Lyra becomes a minority partner. It puts capital into the company and provides coaching, contacts and best practices to help get the business to a lucrative exit where they can sell the entire company.
“We want to invest in companies that would be successful without us so that we just add incremental value,” Chang said.
A lot of that scouting comes from paying attention to a company’s growth metrics.
“We like to see really strong growth year after year. We like to see really strong unit economics meeting really good gross margins.”
Entrepreneurs vs. investors
Chang says that as a young entrepreneur, he found he was overly optimistic in business decisions.
“You think that if you can, then you should. But when you’re an investor, you have a lot more business options.”
Chang says buyers need to be careful not to believe everything they read and see based on how a possible acquisition is marketing itself. A lot of companies spend a lot on marketing to get going, which makes their bottom line look bad.
“But if we see a scale where the marketing spend is proportionately less, then the company could become really profitable. We call that good unit economics.”
What makes a company attractive to investors?
If a company has won a niche customer base, it has the potential for a much broader mainstream reach.
“We like to see companies that have crazy stark raving fans – what we call a tribe, where they are really actively passionate about the product and the brand of the company,” said Chang.
Chang says one of the biggest mistakes he made during his transition from seller to buyer was not being diligent enough about assessing the management, people, founders and teams of the companies he was looking to invest in.
“Being more selective about the people and the capabilities of the team was my biggest learning experience.”
Explore debt options
Another way founders and potential sellers can prove themselves as lucrative investments is to be as financially tied to the success of their company as possible.
“Typically companies come to us without fully utilizing the other options available for them. Instead of taking equity and diluting their ownership, they can take charge of their financial situation by being really, really good at managing their cash flow.”
That means collecting their receivables quickly and finding ways to have longer payment terms with their suppliers, Chang says. He wants to invest in companies that find other ways to finance themselves, including using debt.
“I fully expect a company to have cash flow coming from the founders – their personal wealth, including putting their house on the line, using their personal credit cards.”
This should happen before a company raises money through equity, which dilutes founders’ ownership when their company is still small. Chang says founders who exhaust their debt options are more trustworthy in his eyes.
“They have a lot to lose. It also shows that the company is resourceful.”
Charles Chang will be speaking at the Business Transitions Forum in Vancouver November 6. A conference for business owners, the Business Transitions Forum provides tactical takeaways to help owners make smarter decisions in the short term while setting up for a successful transition in the future.