Small business owners, without a doubt, have reason to believe. They lay it on the line to fill a need that can only be met by their unique skill set. It should be no surprise, that when they go out to raise capital, they expect to be successful. I don’t think that’s a misguided expectation.
It doesn’t take a rocket scientist to know that the capital markets are inefficient in information. But they are subject to public opinion (Google Goldman Sachs), politics (see your Facebook newsfeed), and reality TV shows (see Shark Tank), as much as any political subject our favorite candidates hem and haw over.
Therein lies the issue. Do you know what else is confusing? Cars. My car squeals when I drive it on warm days, creaks when I drive it on cold days, and even whispers “I hate you” when I get in the driver’s seat on Tuesdays. I need a mechanic. I need someone who has seen this happen over and over, and who can diagnose and fix the issue his sleep. If I dive into it myself, there is a small chance of finding the problem and fixing it. There is a better chance that I’ll waste a Saturday morning that should have been spent watching Iowa’s football team beat Wisconsin. I need a trusted advisor.
I’m getting carried away with metaphors, but I am obviously alluding to your need for an investment banker. Unless Google, Oracle, or the New York Yankees are pounding on your door, you need help setting your expectations of the capital marketplace. You need someone who is going to be in your corner, who is going to be unemotional, and who is going to help you navigate the waters because they have been there before.
The data proves my point. A recent study by Pepperdine University revealed that the level of confidence for successful financing was consistent among businesses regardless of size, and across almost all types of capital (figure 1).
At the same time, companies under $5 million in revenue attempted to raise capital far more than those between $5 million and $10 million in revenue (figure 2).
Despite a similar confidence level for success and more attempts by companies under $5 million in revenue, their larger counterparts between $5 million and $10 million in revenue saw far more success (figure 3).
According to the study, the most successful means for the smaller organizations to raise capital is through friends and family. Meanwhile, banks provide the most success for larger companies. It is interesting to note, that crowd funding, while garnering fewer attempts by smaller companies, was almost as successful as angel capital and even more successful than venture capital (figure 3).
Of the companies that were unsuccessful, many discovered that the type of capital being sought was not a fit for their business anyway. An average of 55 percent of companies that failed to raise institutional equity (private equity, venture capital and angel capital) believed that it was the wrong fit for their business (figure 4).
This goes to show that an advisor could have helped the organization make the right decision upfront, and possibly, improved their success on the backend. The moral of the story is: hire a mechanic, and you will have more time to watch Iowa beat Wisconsin…err, um…work on your business.
For more information on Pepperdine University’s Private Capital Market Project, please visit the their website.