Every growing business needs capital to invest in expanding productive capacity, hiring more employees, updating technology, building new facilities, and working toward key strategic business objectives.
Now that the economy seems to finally be back on solid footing, more CEOs and small business owners are feeling optimistic and are ready to start investing again. According to The Wall Street Journal/Vistage Small Business CEO survey, 51 percent of CEOs of small private firms said in August 2014 that they planned to increase their capital spending in the next 12 months. But one question that many small business owners struggle with, especially if it’s their first time leading the company through a period of significant growth, is: “now that you have financing for your business, what's the ‘right’ way to invest it?”
Fast-growing businesses always have a lot of needs for investment, and a lot of possible places for that business capital to go: employees, infrastructure, marketing, systems, equipment, or all of the above. The challenge comes with business owners who worry that they are investing in the “wrong” things. Small business owners who are used to running their company as a lean, minimalist, bootstrapped operation often feel a bit of anxiety when it comes time to actually start investing some serious cash into the business. What if you get it wrong? What if your investments don’t pay off? What if you’re spending money in the wrong way, and it won’t result in the growth and success that you had envisioned?
We talked with management consultant Matt Turner, founder of the consulting firm Boston Turner Group, about the overall landscape for how fast-growing businesses tend to invest their capital, the biggest opportunities of investing for growth, and how these trends are shaping up for 2015. Matt said that the good news is that 2015 is looking to be a good year for growing businesses to raise capital and invest in further growth.
“As we look ahead to 2015, capital is available in a number of ways that are favorable to early-stage and growth companies. The cost of money is still inexpensive, there is a wider range of capital raise options, and public market valuations are rising overall. The private equity markets typically follow, meaning that 2015 is a unique opportunity to raise capital at a good company valuation which is favorable to entrepreneurs.”One challenge for early-stage startups is that the company founders are often reluctant to give up equity in their company in order to attract venture capital. Fortunately, Matt says that there are a variety of new funding models available today that involve debt instead of equity, so entrepreneurs can raise the money they need to grow, without giving up a share of ownership of the company.
“Of course, if your company chooses a funding model that uses debt instead of equity, the cost of money is higher but it’s still usually a win-win,” Matt said. “An example is ‘royalty-based financing,’ which is a growing category. The capital providing company doesn't require equity but instead takes a royalty, or percentage, of the future sales of the company until they reach the agreed upon ceiling. The company borrowing the money doesn't need to give up equity or worry about a future sale or exit in order to satisfy the capital company.”
It’s hard to generalize about any one “right” way to invest capital, because every business has different challenges and different strengths, but in general, Turner said that in 2015, he is encouraging business owners to look at human resources and long-term capital investments.
“Unemployment is decreasing – the latest stats from the Bureau of Labor Statistics showed that the unemployment rate is down to 5.6 percent,” Matt said. “That means it’s going to be harder for companies to find great employees as unemployment decreases. Also, since capital is currently so cheap, it’s time to look at your equipment and technology and see what makes sense for some longer-term investments and upgrades.”
Before deciding on specific investments, small business owners should do a careful, thorough assessment of their company’s growth potential, opportunities, and risks. Matt recommends using the following questions as a framework to evaluate your company’s current performance and make smart strategic decisions about future investments:
- Can we strengthen our current positions? For example, do we currently have the right people, plant, processes, and technology to scale, or do we risk failure? Can we grow with increasing profits or is there a flat rate of investment that returns a flat rate of new revenue? Is growth sustainable or will it distract from your core business? What are our current inefficiencies? Where are the biggest risks to our current revenue, customers, and recurring income?
- Can we increase our current market share or share of wallet? Where are you trying to compete, and which customers are you trying to sell to? Business owners often focus on growth by expanding into new markets and acquiring new customers – but it can often be much more profitable to expand a company’s presence in its existing markets or grow the share of wallet of current customers. Making a decision about this aspect of business strategy requires a clear-eyed, in-depth SWOT analysis of your competitors and your company’s own position and performance in your existing markets. “Most companies agree that it costs seven times more to attract a new customer as to sell to an existing customer,” Matt said. Selling more to your existing customers or growing your share of your existing market isn’t always exciting, but it’s often the best way to grow.
- Is it time for a set of new product launches? Are you in a highly saturated market? Are your profit margins under pressure from lower-cost competition? Is your product lineup in danger of becoming stale, or do you need to stay ahead of emerging competition? It might be time to develop some new products or revamp your slower-selling products.
- Can we generate better leverage through a channel or partner program? One of the best ways for small businesses to boost their sales is to combine strengths with other small businesses for cross-promotions and strategic partnerships. “Great partnerships are about providing each other leverage,” said Matt. “For example, you might have a partnership where the other business gets to leverage your company’s skills and product development, and you get access to their sales organization and customer base. Setting this up correctly can take time and resources, but it can be a recipe for explosive growth.”