Mistake #10: Not Partnering with Useful Capital

Useful Capital is a true operating partner that has a track-record of success in your space.  

Reasons for Useful Capital:

1. To create liquidity for founders;
2. To create scale in the business; and
3. To mitigate execution and financial risk .

Useful Capital is available to companies with the following characteristics:

1. A company with a market opportunity greater than $50M in the next five years
2. Ability aggregate a portfolio of businesses (growth through tuck in acquisitions to cross-sell to existing customers and/or where we can add proprietary IP)
3. Platforms attributes and value-proposition
4. Three to seven year exit time frames with zero platform loss tolerance

Useful Capital takes on the following characteristics:

1. Advisors provide strategic guidance, industry expertise, and process excellence
2. Track-record in similar industry and with similar business models

There is a higher probability of success when outside help is utilized such that a businesses will focus on their core activities to achieve higher returns. Venture and private equity groups have realized this and teamed with advisory groups to manufacture mid-market investments.

 

People dependent businesses flourish when ‘Useful Capital’, bundled resources, and employees are all integrated in a unique business model and opportunity. Sometimes institutional investors are too focused on management and the leadership team and not enough focus on business models and strategic effectiveness resulting in difficult investments. Typically, a good institutional investor that represents ‘Useful Money’ can be an effective board member for emerging, mid-market organizations that need additional guidance and operating knowledge.

 

What is clear is that emerging and nascent firms need capital. Emerging firms are strategically biased by the leader/founder and thus need outside perspectives in evaluating and executing the long-term prospects for the business.

 

Getting ‘Useful Capital’ and external perspectives are fundamental to shareholder wealth!

 

 

Evaluating Useful Capital criteria:

1. Agree on shared values, norms, and principles;
2. Constituency Alignment documented via business plan, financial models, operating plans, and company/team meetings; and 
3. Define the“Arbitrator.”

Savvy business owners are looking for investor’s that provide “Useful Capital”; i.e. the investors provide relationships, industry specific knowledge, and bring real operating  experience and expertise versus academic or only portfolio management experience. 

“Useful Capital” providers illustrate the following capabilities:

1. Advisors that provide more than simple board seat occupancy and financial controls; they provide domain guidance and operating expertise
2. Have previously invested in the specific business sector before i.e. they know the players, customers, partners, and key performance indicators intuitively
3. Understand what is needed to create wealth in the specific sector, not theoretical or unproven ideas

Additionally, “Useful Capital” has had success or has access to Operating Partners in your industry that have achieved the following:

1. Created a “Franchise Effect” and Effectively Positioned a Brand as #1
2. Built distribution and sales forces that are more cost-efficient than the competition
3. Created scalable operating processes with measurements that exceed industry benchmarks: i.e. greater than $200k of revenue and 30% field level EBITDA per employee
4. Implemented product portfolio strategies and tiered service levels
5. Created Channel and Strategic Alliances that generate at least a third of new sales
6. Utilized outsourcing techniques to create and implement “best of breed” processes.