Many ambitious entrepreneurs need to raise money to help drive the growth of their business. Those faced with this dilemma have traditionally turned to buyout firms in both Canada and the U.S. to fund their growth as it was the primary solution available. However, in doing so, they gave up control of their companies.
As a result, Canadian mid-market companies have historically been reluctant to raise funds, as they have few options for patient, long- term, minority capital to help close the growth capital gap and scale up their business without giving up control, as outlined in this article.
What’s more, many Canadian companies that could scale up therefore don’t take advantage of the opportunity in front of them. In fact, this lack of scale now accounts for 20 per cent of the labour productivity gap between Canadian and U.S. businesses, among other concerns.
Giving up control has the potential to put entrepreneurs at risk
There are certainly some instances where it may make sense for an entrepreneur to give up control of their company. Indeed, it can be a great solution for those who want to exit within a 3-5-year window, or for those nearing retirement.
But it’s not the right decision for everyone – particularly when it comes to younger entrepreneurs of mid-sized companies who have longer time horizons in which to grow their business. Further, giving up control of their company makes an entrepreneur more susceptible to several potential risks:
- They can be replaced: There are many examples of CEOs who have been let go after taking on a majority shareholder, with reasons ranging from strategy disputes and having a bad quarter to simply a desire for a change in leadership. In fact, according to research in the Harvard Business Review, 50 per cent of founders are no longer the CEO by year three.
- Their debt load could constrain their growth: Entrepreneurs who want to grow with a control investor typically have significant debt they must service, and therefore have less cash to invest in the business. Being over-leveraged will also make it more challenging for a company to survive the ups and downs of economic cycles.
- The company likely won’t achieve its full potential in a short time period: Buyout funds are structured to seek out 3-5-year investment windows before being compelled to force an exit. By the midpoint in this time period, funds are beginning to prepare for an eventual sale and any investments without very quick payback periods are often overlooked. As a result, the company is not likely to reach its full potential as capital is allocated to debt service and capital investment is curtailed. Great companies are built over decades.
A new path to growth with a long-term horizon and a trusted partner
The Canadian Business Growth Fund (CBGF) was specifically created to provide long-term, patient, minority capital to ambitious entrepreneurs to fund the growth and expansion of their small to medium-sized enterprises, without having to give up that control. We are committed to being supportive, long-term minority partners to entrepreneurs who are aligned with our values – and we’ll provide advice and support every step of the way.
As a minority investor, the CBGF cannot seek to replace management. In contrast, we work with our entrepreneur partners to help bring the appropriate mentors and advisors to the table to help them gain the skills needed to face the formidable scale up challenges they will face. The only way Canada will produce more great leaders of large companies is to support entrepreneurs on their path from growing their small companies into big ones.
In addition, the CBGF does not count on high leverage levels to maximize short term returns. We are not financial engineers and do not want the company at risk of being over-levered. With a more conservative approach to debt levels, entrepreneurs are better able to weather economic storms, and invest more into the growth of their business.
Lastly, as an evergreen fund with no fixed period of time to invest our capital, we let the entrepreneur decide when the time is right for exit. The CBGF can be a partner for five, 10, 15 years or longer if it is deemed optimal for the company which provides them with ample opportunity to focus on attaining their growth objectives.
As the CBGF helps small companies become large companies over time, while keeping entrepreneurs in control of their companies, the Canadian economy will be the ultimate beneficiary. SME’s drive more than half our GDP. As this category of our economy grows, job creation expands, resulting in greater Canadian prosperity. It is our hope that the CBGF’s efforts can help more Canadian companies become global leaders in their industries, resulting in Canada becoming a global force in scaling up our home-grown enterprises.