Corporate America—especially legacy venture capital (VC) and private equity (PE) firms—is losing millions of dollars in potential investment by not looking at small- and medium-sized business. The main reason for this slight – these SMBs do not aspire to be billion-dollar companies. Paul Ford, founder and president of DS9 Capital, a founder-friendly portfolio management holding company, explains how these large-scale investment firms are losing a golden investment opportunity that will not only generate income but, just as importantly, create goodwill. Corporate America has also shown a tendency to bypass smaller cap companies not based in large metropolitan areas. “The cycle needs to change. America needs companies to play matchmaker between capital investors and underrepresented businesses, especially those owned by women and minorities,” explains Ford.
The prevailing attitude of large VC/PE firms has been to ignore companies that either will not generate billions of dollars or whose principals are content with being, for example, a $120-million company. “Large investment firms are focused solely on building multi-billion-dollar companies. Why should a small company be shunned because it doesn’t meet these firms’ so-called high standards? There has to be another way to get investment capital other than resorting only to VC and PE companies,” says Ford.
There is a huge disconnect in the investment world, explains Ford, as these SMBs do have great business plans, outstanding teams and are economically successful, but because they do not have the ability to capture an infusion of investment cash, they are being denied the opportunity to reach their potential. ”The goal has to be to build sustainable pioneering companies that create jobs and elevate opportunities for underrepresented people. These smaller companies may also just need help overcoming a stumbling block. In reality, all they need is someone to believe in them. Has the Land of Opportunity become the Land Where Only the Super-Rich Can Catch a Break?” asks Ford.
Bias in the Investment System
The inherent bias problem is significant, especially for minority- and female-run SMBs seeking an infusion of cash.
- Male entrepreneurs are 60 percent more likely to get funding compared to females, even when both pitch the same business idea(1)
- In 2015, more than three-quarters of VC money in the US went to companies in Massachusetts, New York, and California. Only 5 percent went to female founders. Just one percent went to African Americans and Latinos.(2)
- Funding to female entrepreneurs dropped from 2.7 percent in 2019 to 1.8 percent in 2020, and mixed-gender teams received just 11.1 percent in 2020, compared to 12.9 percent in 2019.(3)
Potential Benefits of Investing in SMBs
According to Ford, another area where large investment firms are missing out when they ignore small-market businesses is the goodwill it creates for the large company. Reputation to a company is a currency just as valuable as cash.
However, there is an even greater question that needs to be asked: What if this SMB blossoms into a huge company? Many of the largest and most profitable publicly traded businesses started as SMBs.(4) Smaller companies can adapt more easily and faster to new technology, which in turn, can help them develop new markets faster than larger companies.
Another question Ford asks is what if the SMB doesn’t need millions or even hundreds of millions of dollars. “Perhaps, the company does need a quick infusion of money, but what it needs more than anything else is help. Maybe help overcoming a problem, or guidance to grow beyond what they had expected. An investment firm, such as DS9 Capital, would come in, invest, advise, and sit back and enjoy watching the firm grow.”
As Ford explains, it would be a huge mistake for an investment firm to swoop in and take control. That is not what SMBs want—or need. The investment firms will make money off of the smaller firm via repayment of the investment capital, fee for services, profit-sharing, or whichever accords are agreed upon. The current VC/PE mentality has led to a blind spot that creates income inequity and holds back innovation. The reasons behind this trend can be traced in part to a “good old boy” network philosophy which has put investment decisions into the hands of a handful of people in a handful of cities. (5)
A fundamental shift is needed to bring fairness and balance to the private equity and venture capital system. The old model is outdated, and it is time to give attention and opportunity to smaller businesses that represent the true fabric of America. Financial innovators like DS9 Capital say it is time for investors to address the needs of the entire nation and provide balanced opportunity and equity across all business spectrums.
The solution, Ford says, is finding larger companies with the same mindset as the smaller ones to help the smaller company with financing, experience, and expertise. “A program that matches company founders with forward thinking investors is a win-win opportunity for all involved. We want to be the ‘universal translator’ for small to medium companies who may not know the language of venture capital, private equity, expansion, applications, digitization and automation. It’s time for SMBs to rise above this inequity created by Corporate America’s lack of vision.”
DS9 Capital is a founder-friendly portfolio management holding company focused on building enduring and stable cash-flowing businesses in the insurance and healthcare technology space. DS9 is generally focused on frontier technology and service offerings in the insurance and healthcare space largely leveraging cloud-based infrastructure, and more specifically on applying our domain expertise to nano-cap sized businesses to expand the value chain for all stakeholders. This value creation typically includes investment, leveraging our vast resources and networks to create a strategic pipeline for organic growth, and realigning the businesses to optimize commercial and IP assets. Our tactical goal with each of our companies is to leverage our expertise into higher margin and missed revenue opportunities.