Useful Capital & Founder-Friendly Financing during Inflationary Times
Introduction
As we complete two decades of experience in advising entrepreneurs, Founders, CEO Entrepreneurs, and their Boards, as well as the Institutional Investment community. We have come to realize that the development of the skill sets of company Founders and Leaders is critically important in attracting Useful Capital!
Additionally, over the past few years the institutional investment community has come to the same realization, especially in technology-enabled and labor-intensive service businesses. Simply stated, technology-enabled, asset-light service businesses are perform-oriented businesses; thus, strategic leadership and operational effective management teams are a prerequisite for wealth creation.
The second prerequisite for wealth creation is “appropriate and relevant” capital and the sources of capital that “add value” to the business model's growth and execution capabilities. At Ephor, we utilize a concept called “Useful Capital”.
As I am sure you have come to realize and observe, the ability to create a growth, a capable, and scalable business model, and the resulting wealth is, at the end of the day, a marriage of the leaders’ skill and capital sources that conterminously and collectively “adds value” to the business model and its stakeholders.
Stated slightly differently, wealth creation from an emerging business and successful business models is an outcome of an effectively planned and executed business strategy, coupled with the knowledgeable and experienced skill set of the leadership, and the deployment of “Useful Capital”.
The enhanced skill needs of the CEO combined with “Useful Capital” will be more important than ever, especially during the current inflationary times and disruptive political environments will be two “critical factors” to survive and create consistent shareholder wealth in the near-term.
Therefore, in the near-term: “Useful" Friendly Capital will only be available for the” best” business models.
Simply stated, at the end of 2021 statistic tell us that there is $1.80 of capital available (supply) for every dollar of capital required (demand) for “worthy” emerging businesses. As such, the Institutional Investment community will be forced by this market dynamic, to become more knowledgeable, more “Useful,” and more flexible to your capital and financial engineering needs.
To be clear: only the most skilled leadership teams and effective & efficient business models will have the privilege to take advantage of this capital market imbalance and attract “Useful Capital”.
Attributes of Useful Capital Providers
This supply-to-demand imbalance will require the Institutional Investment community to specialize and create focus areas of expertise over the near-term.
Therefore, Institutional Investors will no longer be “generalists”. Currently, most of the private equity, family offices, mezzanine, and structured debt providers have migrated to areas of specialization.
Fortunately, for those of us who have a passion for service businesses and people-centric business models, many of the most capable and noted investors are now focusing on business services entities. Thus, they have become more knowledgeable and more forthcoming in providing Useful Capital for our business needs.
To add value to your business, Useful Capital providers should exhibit the following:
Have made at least 3 previous investments in “like-sector” businesses to yours. Therefore, they can provide domain and strategic input, not just financial engineering.
Have referenceable investments where the Operating Management of the investment can be a “testimonial” that they are indeed “Useful” and were a valuable partner in the growth and development of the company.
Be able to credential the company in the sector, as well as provide potential C-level contacts and clients in the sector.
Illustrate they are “patient capital” and have stayed with the previous investments through economic cycles, or for an extended period.
Have performed the Corporate Development function for their portfolio company effectively and without abusive fee structures.
Illustrate that, as Board Members, they are committed to “holistic” stakeholder balance first, versus their biased fund needs. They are open and receptive of "outsider" board members.
Are committed to staying out of the day-to-day operations of the business and will focus on strategic and governance initiatives. Remember most financial types think they can operate any business: the truth is they cannot!
Simply stated, make sure that your partnership with the Institutional Investor is highly defined and “make them invest more than money”. They need to invest time and effort beyond their capital to earn their return on the capital deployed. After all, it is you and your team that will do the majority of the “heavy lifting”.
How to Attract Useful Capital
Although this supply and demand imbalance may exist and be in the favor of your company, Institutional Investors have a fiduciary responsibility to their suppliers of capital to achieve the investment objectives and their return requirements.
Therefore, just like you, Institutional Investors have their own business and business model attributes that they look for to achieve their investment objectives. These attributes are generally an outcome of their investment objectives and “portfolio” objectives.
Over the past 20+ years at Ephor, we have observed some common attributes of business models and businesses that are generally within the targeted attributes, that qualified Institutional Investors are most interested in, they are:
Consistent revenue growth for the past 3-4 years, reflective of the relevant market opportunity
Consistent profitability or EBITDA growth over the past 3-4 years relative to the revenue growth of the company
Revenue growth is a result of a “Portfolio” of revenue sources not just direct sales
A defined market niche and unique positioning in the sector
Definable, contractually centric and predictable revenue streams for the near-term
A differentiated value proposition, product, and service offering
Effective marketing, company awareness and lead generation programs and processes
The business model and business process illustrates consistent scalability and productivity increases year-over-year
Low fixed cost structures: the more variable costs the better\
Superior client and revenue retention; client base is referenceable
Capable and backable management team beyond the CEO or founder
Illustrates effective Management Science and Operational Measurement of Metrics
Effective and accurate financial forecasting, reporting and budget-to-actual analysis
Effective utilization of outside advisors with sector expertise beyond accounting and law firms
At Ephor, we realize that this near-perfect profile is, at best, difficult to obtain. What we can tell you is, over the 19 Institutional Investments we have been involved in since our inception 2001, Institutional Investors are keenly interested in companies and leaders that have consistent “get better programs” in place in their organizations.
We invite you to obtain and review Ephor’s Organizational Clarity Concept, which is widely recognized and adopted in the Institutional Investment community, as a “Yellow Brick Road”, for service business model success!