Competitive advantages can both increase and decrease as a business gets larger. One thing that gets easier for larger companies is attracting business investment and financing. The chart below from John Paglia at the Pepperdine Business School demonstrates the shortage in capital and investment sources he found for companies with less than $5 million in EBITDA and a dramatic shortfall for companies with less than $1 million in EBITDA.
Business Investment Shortage for Smaller Companies
If your company fits within this size range looking for financing, here are some observations I have found to increase your changes of finding an investment partner.
- Write a compelling one-page description of your company and its competitive advantages. Potential investors needs a simple, short description of your company so they can quickly decide (for your benefit and theirs) whether you both want to spend more time exploring a relationship. Even if you never show it to someone, this exercise can help focus your thoughts and ideas about your business.
- Invest (sometimes only a little is needed) in the most accurate accounting you can. It is painful to spend money on overhead, but it pays off when trying to attract financing. Your numbers need to inspire confidence and investors do not want to waste time on a situation where they cannot understand the numbers or they are not compiled using Generally Accepted Accounting Principles.
- Kiss a lot of frogs. Finding an investment partner is more about finding someone that is the best fit for your company than convincing the world that your business is great. If a potential partner is not a good fit for your business (according to either you or them), move on quickly. Do not waste your time trying to convince someone that is not predisposed to like your company. Thus, you will probably need to talk to 50 or 100 potential investors to find the 3-5 that may be a good fit. Treat a “no” as a positive thing — you no longer have to spend time on that person. If your business is a good candidate for financing, do not worry about the people that are not a good fit and focus your energy on those that are.
My investment fund, Greybull Stewardship, was founded to focus on exactly these companies with less than $3 million in EBITDA. My perfect situations are companies where the current management has a good track record with the business and wants to stick with the business, and the management wants to hold a lot of equity post transaction. For those companies, there is no better long-term co-owner than Greybull Stewardship. Greybull’s structure is unique in that we can allow each company to continue to pursue its unique strategy without being forced into a formula of being sold in a certain number of years or being forced to grow at a rate that is imperfect for the business.
- You Are What You Eat (or Where You Get Your Investment) (masonmyers.com, November 26, 2012)
- Honey, I Shrunk the Definition of “Long-Term Investing” (masonmyers.com, September 26, 2012)
- Chart of Most Profitable Industries — Improve Your Odds of Business Success (masonmyers.com, August 28, 2012)
- “Strategy Follows Structure” — Vanguard Founder John Bogle on Investment Funds (masonmyers.com, August 17, 2012)
- Are We Entering 2013 in Crunch-Mode? (genuinevc.com)
- Study Finds PE- and VC-Backed Cos Have Significantly Stronger Sales and Job Growth (pehub.com)