Useful Capital Strategy for Overcoming the Founder's Dilemma in 2013
Ephor Group | www.ephorgroup.com | 24 E Greenway Plaza Suite 440 | Houston, TX 77046Useful Capital Strategies for 2013 and BeyondWhile growth capital is readily available for only large scale and profitable enterprises andventure capital is focused on a narrow segment of industry sectors (life and bio sciences, hightech and software, and energy); entrepreneur useful capital sources for asset light servicebusinesses are bridging the gap for companies looking to jump the chasm from a small andmedium sized business with limited financing options to a market leader.And jumping the chasm creates the opportunity for wealth creation for founders that is notreadily available via other financing instruments.The Availability of CapitalFor startups driven by innovative founders venture capital can be the perfect marriage offunding coupled with ongoing management support necessary to transform the company into amarket leader.But for most entrepreneurs venture capital (VC) is simply not available as the company focus istoo narrow and/or the industry is not sexy (Exhibit A1 and Exhibit A2). Annually there areapproximately half a million businesses created in the USA, and only 600 to 800 companiesreceive venture capital funding. For asset light businesses venture capital is simply not available.The Hidden Agenda of Venture Capital Fiduciary ResponsibilitiesDid you know that the VC’s over the last decade returned their investors on average less returnsafter costs than standard fund indexes (Exhibit A4)?VC’s swing for homeruns and yet only average 8 to 24% percent investment returns. Plus thelegal responsibility to maximize returns to their shareholders and not the invested companyshareholders capitates funding flexibility for entrepreneurs. At the end of the day VC’s arefiducially responsible to their investors and not to entrepreneurs.For companies in high growth sectors and therefore attractive to the growth capital segment ofprivate equity investment there exists a large pool of un-invested capital seeking returns by bothfinancial buyers and corporate strategic buyers.For asset lightservices businessesvaluation multiples:Subscale Business<$20MScaled Enterprise>$25M0.5X to 4X Revenues2 to 6X Ad. EBITDA (pre taxprofits)1 to 4X Revenues for Services2 to 10X Revenues for Software5 to 10X Adj .EBITDAEntrepreneur useful capital is a flexible investment loan that preserves equity.
Useful Capital Strategies for 2013Ephor Group | www.ephorgroup.com | 24 E. Greenway Plaza Suite 404 | Houston, TX 77046Creating Wealth Through Growth by Overcoming the Chasm and Growing fromSubscale to ScaleDid you know that from 1995 to 2009, privately funded capital backed companies grew sales by133%, while the average United States company grew sales by 28%1?Clearly capital is needed for growth. Theproblem is it takes a lot to transition from asmall subscale company to a large scaledcompany including new customers, newbusiness model execution requirements toachieve significant market share, upgrades inyour leadership team and culture, and growthcapital to scale the business to match newdemands.Of the 1,000,000 companies with 20 to 99 employees fewer than 1 in 4 achieve 20%+ year overyear growth.These emerging companies are incredibly important to our economy as they represent well over4x the average American company’s sales growth and nearly 7 times their new job growth.For entrepreneurs that want to create wealth for themselves and their employees and not onlytheir investors they must choose a capital funding solution which preserves equity as they grow.1Capital backed companies grew jobs by 82%, while all other companies in the U.S. economy grew jobs by 12%.
Useful Capital Strategies for 2013Ephor Group | www.ephorgroup.com | 24 E. Greenway Plaza Suite 404 | Houston, TX 77046Entrepreneur Useful Capital is an Alternative to Venture CapitalAn alternative to venture capital (VC) funding is capital that preserves the founder’s equity andhas flexible payment terms controlled by the entrepreneur.Historically, startups have raised seed funding from friends and family money and/or angelcapital to create an initial product or service in the market to validate the initial idea.Venture capital is used to accelerate growth and capitalize on significantly large marketopportunities. Once a company is beyond its rapid growth stage multiple types of private equitycapital are available to profitable enterprises with significant EBITDA in the form of mezzanineand growth capital instruments in order to recapitalize the business. A recap is most often usedfor the purposes of succession planning and/or to pursue expansion.There are better options for asset light service businesses. Most business owners have heard allabout venture capital funds as a source of funding for startups and early-stage companies. Butwhat about profitable companies who want to preserve their equity— where can they go for theirmillions?Looking to grow and create liquidity?“Entrepreneur Useful Capital” works for the entrepreneur and has the following attributes: Access to capital and debt that preserves the equity. Blended instrument combines the best of equity capital and debt financing. Investorsshare in the revenue profits and are protected by a term loan. Can be converted to debt at an approved rate. Does not inhibit the cash flow of the current operations. Growth capital without loss of control or dilution.Entrepreneur useful capital is the alignment of interests between founders and financiers. Full ownership and control retained. No company valuation. No dilution. No loss of control. Returns capped.How Entrepreneur Useful Capital Compares:EntrepreneurUseful CapitalVenture CapitalAlignment of InterestsAligned with revenuegrowthCan be misalignedregarding growth and exitCost of Capital Targeted 2x return Targeted 10x returnLoss of Control No Yes, to what extent variesPersonal Guarantees No SometimesValuation of Company Required No Yes
Useful Capital Strategies for 2013Ephor Group | www.ephorgroup.com | 24 E. Greenway Plaza Suite 404 | Houston, TX 77046Jumping the Chasm from a Subscale Company to a Scaled EnterpriseJumping the chasm from a “subscale business” to what financial investors and strategic buyersconsider a “scaled enterprise” is really difficult2. Did you know that less than 1% of new businessachieves $10 million in annual revenues in their first ten years?Of these, six out of every ten fail to “jump the chasm from subscale or scale”. For anybusinesses, growing beyond subscale requires a smart plan for growth. The three most commonreasons cited for failure by owners include:1. The business value proposition is not demanded and differentiated sufficiently (i.e.the market opportunity is too small).2. The business model execution is not profitable at scale.3. Leadership & culture barriers derailed growth and profitability.Businesses most commonly organically grow through incrementalism. Creating wealth requiresan infusion of strategy and vision coupled with significant leaps in size and profitability. Asignificant leap requires equal parts of capital and leadership.Jumping the chasm…Current State Wealth StateGovernance by the founders Governance by a board of directors including foundersand outsiders.Leadership team is the managementteamLeadership is coupled with Management Science andan engaged employee culture.Growth is organic Growth is a portfolio.Portfolio of products/services beyondthe initial sell does not existThe customers lifecycle is proactively managed.Raving Fans are known but notscientifically cultivatedRaving Fans create a lower cost of sales.Scalability depends on 1 location or 1team of peopleScalability is best in class.Key performance indicators are best in class.Strategy relies on the founders Strategy is a perpetual process both bottoms up andacross the organization.Define Success Differently: Define Success as Wealth CreationIt’s an old but true cliché: Service businesses are either growing or dying. We understand thechallenge of positioning your company for long-term success. We’ve been there – asentrepreneurs and operators focused on building businesses and engineering wealth creation.Creating wealth not only requires a great business staffed with a talented team; it also requiresa strategy for wealth creation. Plus, owners do not cash large checks until their companiesachieve scale.
Useful Capital Strategies for 2013Ephor Group | www.ephorgroup.com | 24 E. Greenway Plaza Suite 404 | Houston, TX 77046Entrepreneur Useful Capital FAQsQuestion: At what stage does Entrepreneur Useful Capital become available?Answer: Capital is available once the following criteria are met: The business plan for growth is documented and validated by greater than$1M EBITDA profitability. The strategy, vision, and leadership team is defined and aligned. The business key performance indicators illustrate scalability and outperformthe competition (i.e. are “best-in-class”). Capital efficient business with high margins. Recurring revenue models such as SaaS and subscription services. Growth capital needed to improve valuation by jumping the chasm from asubscale startup to a large scale enterprise.Question: How is Entrepreneur Useful Capital structured?Answer: In return for an investment loan, an agreed to percentage of future revenue is paidto investors until the investment is repaid, inclusive up to an agreed to returnamount. Determination of the total amount to be paid is based on the timing andcertainty of payment amounts and other risk factors. The investment loan amountranges from $2 to $20M.One of the key elements is the flexibility of payment. Revenue profits are paid on apreset amount (2% to 8%) during the term of the term loan up to a pre agreedamount and the term loan is paid in kind interest due at the end of the term loan oravailable to be paid in advance at a pre agreed interest rate premium.Question: What is the process?Answer: Like any investment, due diligence of the financials, business plan and operatingplan, and interviews with the team are conducted. Upon completion and acceptancecapital funding is readily available.Question: How can I learn more?Answer: Email us at ephor[at]ephorgroup.com for a market landscape and valuation for yourindustry.
Useful Capital Strategies for 2013Ephor Group | www.ephorgroup.com | 24 E. Greenway Plaza Suite 404 | Houston, TX 77046Exhibit: Useful Capital Funding Options in 2013Useful Capital Funding eResources & Sources cited:Association for Corporate Growth http://www.acg.org/global/growthstories.aspxPricewaterhouseCoopers MoneyTree™ Report Data http://www.pwcmoneytree.com/National Venture Capital Association & Thomson Reuters www.nvca.org/SBA.Gov Small Business Administration http://www.sba.gov/sites/default/files/FAQ_Sept_2012.pdf
Useful Capital Strategies for 2013Ephor Group | www.ephorgroup.com | 24 E. Greenway Plaza Suite 404 | Houston, TX 77046Growth Capital Exhibit A. Venture Capital Funding & Returns “After studying the performance of more than 6,800 small- and mid-sized businesses between 1995 and2009, the study authors found that revenue growth at firms backed by private equity was 129% greater thanthe growth at control firms. Employment grew by 257% more, with the employee rosters at PE firms jumpingby 50 more employees, while those in the control group increased by 14 employees.” Pepperdine University Venture capital is associated with job creation (accounting for 2% of US GDP),the knowledge economy, andused as a proxy measure of innovation within an economic sector or geography. According to the NationalVenture Capital Association, 11% of private sector jobs come from venture backed companies and venturebacked revenue accounts for 21% of US GDP. According to a 2011 Global Insight study, venture-backed companies accounted for 12 million jobs and $3.1trillion in revenue in the United States in 2010 via Thompson Reuters.Exhibit A1: Growth Capital Funding by Industry via NVCA 2013 Yearbook PDF Report:Exhibit A2: Growth Capital Funding by Industry Sector via NVCA 2013 Yearbook PDF Report:
Useful Capital Strategies for 2013Ephor Group | www.ephorgroup.com | 24 E. Greenway Plaza Suite 404 | Houston, TX 77046Exhibit A3: The Collapse of the IPO MarketExhibit A4: Venture Capital Returns
Useful Capital Strategies for 2013Ephor Group | www.ephorgroup.com | 24 E. Greenway Plaza Suite 404 | Houston, TX 770462013 M&A Forecast & LandscapeWe anticipate M&A activity to be quite robust over the next 12-18 months. Mergers and acquisitions in thesoftware, information technology and BPO services continued at a fast clip in 2012, as the number of dealsrose over 2011 levels. Overall, acquirers have been focusing on complementary acquisitions, with themajority of transactions less than $100M. Looking ahead to 2013 M&A deals for strategics seekingcomplimentary assets/capabilities and also distressed or stagnant small to medium businesses withoutaccess to capital (growth capital liquidity trap) highlight the forecast. There is a shortage of capital for those companies with less than $10 million in EBITDA,but a general surplus for companies with $10 million in EBITDA or more. Risingcomplexities and costs are causing market bifurcation and the thinning of middle class ofbusinesses.2013 useful capital landscape and options: Credit facilities will be almost exclusively asset based lending only. Venture continues to ride the wave of “Consumerism.” The types of businesses that venturecapitalists plan to invest in the next 12 months are 33% targeting information technologyand another 23% planning to invest in health care or biotech. Approximately 44% ofrespondents plan to make new investments outside of the U.S. Mezzanine lenders remain eager to put capital to work with transaction structure and pricingrelatively flexible. Access to growth capital for branded sector leaders only. PEG world suffers from weakreturns from 2005 to 2010 and combined with the difficult economic climate has causedmany anemic companies. M&A corporate development will continue to be strong although deal valuations will belimited and capped. The M&A outlook will remain strong, including deal count volume ascash-rich strategics augment growth and capabilities.1. Strategics Seeking Growth. Conditions are good for an increase in strategicacquisitions in 2013. U.S. corporations have built up immense balance sheetfirepower, with more than $2 trillion of aggregate cash currently earning a minimalreturn. Given the sluggish economic outlook, M&Acan be an effective tool for lifting the top line andgenerating margin improvement through synergiesfollowing an extended period of cost controls.2. Private Equity Financial Sponsors will be focused onselling assets due to pressure to put committedcapital to work and to generate exits. Financialsponsors evaluating platform acquisitions and add-on deals continue to have in excess of $400 billionin uninvested capital that needs to be deployed aswell as access to debt at reasonable terms. At thesame time, achieving fully valued realizations is ahigh priority for private equity firms with aging portfolio companies.
Useful Capital Strategies for 2013Ephor Group | www.ephorgroup.com | 24 E. Greenway Plaza Suite 404 | Houston, TX 770462013 Useful Capital Investment Focus Areas for Technology Software & BPO ServicesTechnology & BPO solutions for customer profitability, data analytics, employee lifecycle managementincluding performance and credentialing, and industry specific solutions.