by Ryan Krumroy
Senior Associate Recruiter at Charles Aris Inc.
The American Experiment is a beautiful thing. In conjunction with the entrepreneurial spirit, it has led to the invention of the automobile, electricity for the masses, air travel, personal computers and really important things like rock ’n’ roll. Time and again, residents of the United States have pushed the envelope, developing incredible inventions and nearly perfecting the ability to sell the citizens of the world on their need for such items.
Amid this innovative spirit is a uniquely American economic engine. I’m not speaking of banks or the public market; nor am I insinuating that other nations haven’t gotten on board. What I’m suggesting is that there’s something special about private equity and venture capital firms.
The role of private equity
Let’s imagine a business owner who has spent the past decade growing a company from the ground up. In fact, let’s give that entrepreneur the benefit of having a profitable $30 million business with a 15 percent EBITDA. The sole proprietor may desire to grow that business to the next level but faces the challenge of getting a bank to provide the needed capital to acquire a competitor. Banks can certainly make great business partners but they typically don’t have the appetite for helping execute on an acquisition strategy.
Herein lies the perfect scenario for a private equity firm to come to the table with an often invaluable proposition. A P.E. group not only provides the needed funding to close an acquisition but in addition helps run due diligence, optimize inefficiencies, provide operating assistance and enable the founder to monetize the value of the company through a liquidity event.
The value of venture capital
Let’s shift over to the ever-interesting world of venture capital firms. Pre-revenue, pre-profit businesses often need more money to allow a longer incubation period than the average founder or traditional bank line will afford.
Envision a 50-employee business three years in which doesn’t actually have a product in the marketplace. Apart from federal grants of some form, these businesses in large part wouldn’t exist. Venture capital firms, however, have brought investors’ cash into a “probability of success” distribution model. In other words, venture capital helps spark the economic engine by taking chances on the next greatest thing.
Biotechnology, pharmaceuticals, software, consumer electronics … the V.C. space has heavily funded some of the most helpful and intriguing out-of-the-box products people have come to appreciate over time. At their best, V.C. firms prime the pump, helping keep the United States globally competitive and allowing government to in large part not choose winners and losers but rather market forces.
These two important pieces of the economic puzzle have done much to drive capital into needed segments, remove operating inefficiencies and get needed ventures off the ground to supply the global market. May the American Experiment continue to produce new and innovative ways to benefit people globally and create prosperity for those up to the challenge.