by Stella Fayman on March 29, 2013
Ask most small business owners how they got started, and chances are you will hear a similar story of how they began by working out of their garage or basement, adding employees as needed, and eventually growing big enough to move into a more professional space. Most of their early funding came from personal savings, and when that dried up, many turned to credit cards or second mortgages.
While the exact inflection point is different for each entrepreneur, most will eventually come to a moment in their expansion when they realize they are going to require additional outside capital if they have any hopes of growing beyond their current business footprint. The warning signs that they have reached this point are typically manifested in a series of “Catch-22’s,” offering undesirable compromises where none of the available options are palatable.
For growing companies, and especially those in the product business, margins are the financial fuel which powers and enables growth. Unfortunately, emerging companies often discover – too late – that their growth curve has become a death spiral. See if this sounds familiar. Your low-cost facility (the only one you could afford when starting up) is now showing its age, and as a result, your costs are starting to go up – dramatically. The time and money you spend just to keep up with repairs has more than doubled, the machines that ARE working could go at any time, the space is cramped, the heating and A/C is spotty at best, and every square inch of roofing, drywall, piping, and flooring has exceeded its life expectancy. Every day you think , “If I could just upgrade to a new energy efficient facility, I could take all of the money I’m currently spending on repairs and maintenance and purchase newer, faster, and more efficient machinery, produce and ship more product, lower my costs, increase productivity, boost worker morale, and dramatically increase my margins. Unfortunately, this requires millions of dollars I don’t have.”
Bank Credit – In order to get early capital for growth, many entrepreneurs used bank loans and lines of credit to fund their company launch. While the terms weren’t that great, this capital enabled the business to expand and grow over time. Unfortunately, most of these funding sources are secured and collateralized by the founders’ personal assets; putting them in a very vulnerable situation should the business take a turn for the worse. When companies hit the Second Stage of their growth curve (typically around 20 employees), financial institutions begin calculating credit worthiness based on the performance of the businesses, versus the personal assets of the founder. As a result, getting additional financing becomes increasingly difficult, prompting entrepreneurs to lament, “If I could only consolidate all of my outstanding debt and revolving credit line into one low-interest payment, I would have the cash flow I need to expand and upgrade my business. Unfortunately, the bank won’t give me the credit terms to make this happen.”
Competitors – You’ve got a better product at a better price, but can’t seem to get the word out. The result is that competitors with inferior products continue to sway buyers because of their heavy investment in advertising and promotions, which you can’t afford to match. You think, “If only I had the budget to add some additional marketing resources, and hire some sales staff to open up new regions nationwide, I could finally get the mindshare and momentum to add significant market share.”
Leadership Gravitas – You’re exhausted from wearing most of the hats when it comes to management and decision making, and long to delegate some of these responsibilities to others. Unfortunately, your current team just doesn’t have the executive experience or strategic horsepower to give you the peace of mind to know these roles are being handled effectively. You often say, “If only I had a qualified leadership team, I could offload some of these tactical responsibilities and focus on the truly strategic activities that will position my company for growth.”
If any of these scenarios describe your current situation, it’s probably time to give strong consideration towards pursuing a growth capital investment. By aligning with a private equity fund capable of investing a significant amount of growth capital into your business, you could address ALL of these challenges that are holding back your company. You could finally get ahead of the curve to efficiently and effectively scale your company, and enjoy the productivity and profitability benefits found only within the context of a larger organization.
Bio: Brendan Anderson is the Co-founder and Managing Partner of Evolution Capital Partner, a small business private equity company that specializes in working with companies in No Man’s Land. For the past 17 years, he has been investing and managing numerous financial services, from real estate development to manufacturing.