Growing Business

There's a pattern that's peculiar to mid-level companies. It goes something like this: A manufacturer enters the market, grows though development of innovative products and excellent management, gets acquired by a by a large, risk-averse company, then basically vanishes. When this happens, the industry loses the excitement those small startups engender, as well as the dollars they generate in new revenue.

So why are these dynamic companies acquired rather than acquiring? Why don't they raise more capital and continue to grow? One reason may be lack of knowledge about how to raise capital, when to do it, where to find it and for what reasons.

Capital is the lifeblood of any industry. Without it, companies are like a farmer who produces a great crop, but can only grow a limited amount because he has no fertilizer. To learn more about venture capital, I contacted Roger Aguinaldo, CEO and publisher of The M&A Advisor and its sister publication Venturereporter.net. Through newsletters, seminars and search engines, Roger enables companies and venture capital firms to find each other.

I asked Roger at what point a company is in a position to attract venture capital; he said it's definitely not at the beginning. Roger explained that startups are challenged early on to find financing because they haven't proven that their business model works. They may have a great idea and a great product, but in most cases that will only get them financing from friends, family and credit cards.

In order to attract outside capital, a company needs to have successfully sold products, shown a profit and created positive cash flow. In other words, they don't just need to have created a great product; they need to have created a successful business. At that point, outside investors are more likely to want in on the action.

The scary part for business owners is that raising outside capital involves taking on new risk. For example, take two partners who've come up with a great idea, invested their life savings (and maybe that of their parents, brothers and sisters), and with hard work and dedication finally made their idea into a successful business. They now have a positive cash flow, they've paid off their debts, and they need to decide whether to cash out or take a risk all over again. Taking a risk is scary enough — doing so without the knowledge of how to raise money makes it a pretty daunting task. No wonder so many entrepreneurs choose to sell out rather than raising the stakes.

Making the situation even more challenging, says Roger, is the fact that most rapidly growing companies consist of only one or two owners, and the few people they employ. Such business owners haven't really thought about what would happen if their growth trajectory outstripped their assets. So when they're confronted with this kind of major decision, they frequently don't know where to turn.

When they do turn to someone, it's usually a lawyer and or an accountant. That is an appropriate step, says Roger, in that it's important to confirm that the company's finances are in good shape. He goes on to point out, however, that it's equally important to recognize the limits of knowledge most lawyers and accountants have. They may know the company inside out — but not when, where or how to find financing.

I asked Roger: who, then, is knowledgeable? He said that a good person to contact is an investment banker. An investment banker knows the capital markets, and can therefore help determine such factors as how much to borrow, what companies to purchase or merge with, and how and where to find the capital to do so.

Here are some good questions that a mid-sized company should ask:

• What kind of shift in attitude and outlook is necessary when considering growth?
• How and where can companies find venture capital?
• How does one find funding at the different stages of a business's growth?
• Of what should a venture capital proposal consist?
• How do you value a business?

Just as crops need fertilizer to grow, a business can only do so much without capital. Eventually, successful entrepreneurs will be faced with the choice between selling out or raising the stakes. If they choose to raise the stakes, capital investment can take a business to the next level.

Though most tradeshow seminars are geared to retailer education, it might be worth considering offering vendor education on how mid-sized companies find the funds to become industry leaders in their own right. Maybe if we help our best and brightest companies find the monetary equivalent of Miracle-Gro fertilizer, we as an industry will experience even greater growth.