America was built on and is dependent on small- and medium-sized businesses (SMBs), yet about half of them do not survive in the long run.(1) Private equity (PE) and venture capital (VC) groups deploy more than $100 billion in capital to SMBs every year.(2) But even with such an influx of money, approximately 20% of small businesses fail in the first year, 30% by the second year, and 50% by the fifth year. (3) Clearly, their survival is about more than just money. One should also note that SMBs—the backbone of the US economy—account for nearly 30 million businesses. In fact, in 2020—pandemic and all—Americans filed the paperwork to start 4.3 million businesses, which according to the U.S. Census Bureau, is a 24% increase from the previous year.(4)
“Founders are tired of investors who KPI the founders’ vision out of the company. SMBs deserve a level playing field and financing from groups that can see their potential,” says Paul Ford, founder and president of DS9 Capital.
Most large VC/PE firms often ignore companies they don’t think will generate billions of dollars or who are content with being a multi-million-dollar company. That’s despite the fact that all businesses start small, and often only become large with the right investment of time and money. Smaller companies, Ford notes, shouldn’t be cast aside because they don’t meet a VC/PE firm’s so-called high standards. It’s a mistake for large investors to categorize small and midsize companies as “small potatoes.” These VC firms are overlooking a cardinal rule of investing, which is to diversify one’s portfolio. Minority-owned SMBs can face even tougher challenges when looking for investors.
Minority founded and owned SMBs face more rigorous questioning while searching for investors. They are more likely to face higher standards when it comes to their growth, where their money is coming from and how they have garnered traction—if any. Ford says investors might scrutinize a minority-owned company in ways a non-minority company would be analyzed; thus, incorrectly presuming one is more successful than the other. It’s unfortunate, but that also means there’s a growing gap where investment is needed and opportunities to help SMBs grow that are otherwise being neglected.
For small business owners looking for someone to finance their next step, it’s important to interview potential investors as though they were hiring someone to work with the company. Finding out what kind of help, not just money, an investor can give will go a long way toward growing the business. Companies might want to look for someone who shares the same kind of vision the founders have. Following are some of the questions these companies should consider asking their potential investor.
- What are the demands they will make of the company?
- Is this investor going to jeopardize the company’s ability to run operations as the principals see fit?
- Will they scare off other investors?
- How stable or diversified is their portfolio of investments and financings? If that’s in jeopardy, one can be sure they’ll increase the pressure—no matter how it could hurt the business.
- Can this investor lead to others? (5)
As Ford explains, it’s important to find an investor with the same kind of growth and profit goals that you have. You want an investor that is involved but isn’t trying to take over. Investors do need to “buy” into your company with more than just capital. “It’s important to look for a finance provider offering guidance on insurance, legal and regulatory matters. Being on the same page when it comes to what you want growth to look like, means you’re more likely to see those goals through,” Ford says.
Investing can be about more than providing capital, it is about connecting businesses and providing help. Knowing where a company is headed and considering their potential provides leverage for its continued success.
There is no such thing as a company that is too small or too minor to deserve investment, Ford believes. Every company starts small until they receive the right kind of investment of time and money to help them grow. All the big names such as Apple, Google, Disney began working out of a garage, basement, or a small office before they grew to be the major employers they are today. “A car is an awesome piece of machinery. It goes nowhere without a battery which is small and ‘cheap’ compared to the overall sum of the machine. Sometimes small means critical” says Ford.
The solution, according to Ford, is for business owners to make sure the investors take a good look at the business. “When evaluating investors remember it is an interview on both sides. Finding someone who can spot opportunities for their investees to get a step ahead of competitors means success for everyone,” says Ford.
About DS9 Capital:
DS9 Capital is a founder-friendly portfolio management holding company focused on building enduring and stable cash-flowing businesses in the insurance and healthcare technology space. DS9 is generally focused on frontier technology and service offerings in the insurance and healthcare space largely leveraging cloud-based infrastructure, and more specifically on applying our domain expertise to nano-cap sized businesses to expand the value chain for all stakeholders. This value creation typically includes investment, leveraging our vast resources and networks to create a strategic pipeline for organic growth, and realigning the businesses to optimize commercial and IP assets. The tactical goal with each of their companies is to leverage our expertise into higher margin and missed revenue opportunities.