Tom Matthews
From the outside looking in, we see founders and their companies closing large rounds of funding and making personal fortunes, but the process to get there is usually a long and arduous road fraught with huge sacrifices and personal costs.
This article sets out some of the major obstacles founders face and potential strategies to mitigate these.
The odds are stacked against you
Being a founder is a high risk proposition and not for the feint-hearted. According to data released by the Australian Bureau of Statistics, about 50% of all Australian businesses fail within the first four years, and just 77% make their first anniversary.
Lack of access to capital
Accessing capital to start a business and fund growth can be challenging for founders. Banks have tight lending criteria and many are unwilling to lend to founder-owned businesses. Those that do often seek personal guarantees from shareholders and security over their private assets. Similarly, the IPO market can be difficult for founder-owned businesses to access. Lack of scale, inadequate reporting systems and the overwhelming cost and burden of regulatory requirements are all impediments for founders trying to access this source of capital.
The financial costs are significant
Given the challenges in accessing capital for growth, many founders use their personal savings to get off the ground and grow their businesses (known as “boot-strapping”). The cost of starting and building a business can be significant. As a result, founders have to tighten their belt and repurpose personal budgets. Many founders often have no regular pay cheque and sacrifice paying themselves to ensure they can meet payroll and keep the business afloat.
The personal costs can be even greater
Being a founder is all consuming. The commitment founders give to their business to help it thrive (or sometimes just survive) is huge. They sacrifice time with their spouse, children, pass up special family events, holidays, etc. Sometimes these constant sacrifices come at the expense of other relationships in a founder’s life. Some founders end up sacrificing these significant relationships or their health / personal wellness.
It’s lonely at the top
Being a founder can also be a very lonely journey. If you do not have enough cash on hand to make payroll, sharing this with your team may cause them to panic and start looking for new jobs. Telling your spouse you have mortgaged the family home to raise funds to keep the business alive can put a serious strain on your marriage. The role of being a founder can be incredibly isolating and lonely, so much so that depression and suicide rates are dramatically higher among them.
Don’t despair, there is a way to de-risk the founder journey
So how do you mitigate all of the negative potential setbacks that will arrive during your founder journey? You might not be able to pre-empt them all but, by partnering with the right growth investor, you can navigate some of these challenges. Below are some ways a growth investor like Pemba can help.
- De-risk and maintain exposure to the upside. By partnering with a growth investor and selling part of the business on completion (rather than all of it), but retaining an ongoing equity stake, a founder can realise some of the value tied up in their company. This enables them to de-risk their personal financial situation, but maintain a meaningful shareholding, and share in the upside from the next stage of the growth journey. They can therefore benefit from an additional “pay day” on sale / exit of the enlarged group. This is known as Pemba’s “two pay day” structure. This “two pay day” structure often generates higher total proceeds for founder than if they sold 100% of their business
- Proven results. Growth investors like Pemba are experts at creating value. One study by Boston Consulting Group found that c.70% of private equity investments generated at least 20% growth in profits and nearly half saw growth of 50% or more
- Make bolder strategic decisions. Selling a part of your business can help to de-risk your own personal finances whilst allowing you to stay closely involved and in control of your business. With the combination of personal financial security and the help of an experienced growth investor, founders can afford to be bolder and braver in their strategic decision-making
- Cash for growth. Growth investors have deep financial resources and can provide the capital required to fuel growth. At Pemba, we provide capital to fund both organic initiatives (such as investment in sales and marketing, new office openings, new software or product development, etc.) as well as other ways to accelerate growth (e.g. strategic bolt-on acquisitions, partnership opportunities, etc.). We also invest in the back-office infrastructure to ensure that all growth is sustainable (e.g. finance, systems, management, etc.)
- Expertise. Growth investors can supply the talent your business is lacking. At Pemba, we work in partnership with founders and management to set the strategic vision for the company and, where required, bring in specialist expertise to help the company deliver on its key growth initiatives. At Pemba, we have a deep network of trusted advisers, management teams, board members and consultants. The right growth investor is your path to a new community of peers and valuable business connections and coaches.
What next?
As a founder, you’ll face an almost endless list of obstacles when it comes to building and growing your company. Bringing on board an experienced growth investor can help de-risk a founder’s journey.
If you are a founder and would like to know more about how Pemba might be able to assist you with some of the challenges covered in this article, then please email me at tomm@pemba.com.au to find out more.
