Investment vs organic growth

Small companies often have stark choices to make when trying to grow: build the business organically or seek external investment. People don’t always consider funding a strategic decision, but it should be, as it will affect the culture of the company.

The decision to obtain external funding is often driven by the need for strategic expansion or for specific projects. This is a much better situation than if external funding is needed to cover day-to-day costs. It buys you time to find the best funding route and decide if you actually need it.

Regardless of motive, an advantage of seeking external funding is that you are introduced to individuals with substantial contact networks who now want you to succeed. You will need to build these relationships and spend time outside normal business operations to take advantage of the opportunity. Funders will want a credible story that shows how their investment will turn a profit in future and how funders will realise this profit.

The downside is that this can make you less visible to your team.

If you do need external funding, especially in the early stages, the first port of call is often friends and family. Here, the effect on the company’s operation and culture is usually minimal – though the impact if the company becomes insolvent can be more personally damaging than anything else.

Alternatively, business bank loans are available and are similar to personal loans, though harder to get. Bank loans require regular income to service the debt, so you need to be sure this is in your business plan. If not managed well, these can cause severe stress at the loan due dates and completely change the way you have to run sales teams to ensure cash flow fits with the loan.

Another less disruptive mechanism is an angel investor, often a high-net-worth individual who has been through the same process and done well from it. With careful negotiation and a bit of luck, investment from an angel investor can also allow the company to trade normally – if you are clear from the outset about your intentions and how much influence they would have during operations.

The investor may want to monitor and control what you do so that their money is best secured. It can affect your business significantly if there is someone looking over your shoulder all the time. If you are the kind of person who finds constructive criticism difficult, or you particularly value autonomy, be very careful about who you take on to fund you.

This brings us to more formal funding mechanisms: venture capital (VC) and private equity (PE). These generally approach companies in different stages of their life cycles – VC for start-ups and scale-ups and PE for mature companies – though both will usually demand oversight of company direction and costs.

PE firms often buy 100% of the companies they’re interested in. This is effectively a buy-out, meaning they have total control and can change the culture of the company completely. Indeed, many specialise in turning unprofitable companies around, so expect severe streamlining, oversight and cost control. Conversely, if your company is doing well, make sure you understand their plans post-investment to see if they want to expand the company (perhaps by joining with another in their portfolio) or just wish to maximise profits with tight cost controls and driving sales targets. If your company depends particularly on its employees’ goodwill to work well, be very careful how you approach this.

Many companies would be better to grow at their own pace, allowing themselves to set their own culture and direction. Funding from organic growth provides you with complete control and flexibility on how you run your business.

There is no right or wrong answer. It all depends on how you want to run your business and what your plans are for the future. Whatever you do, make sure it is a measured decision and not a knee-jerk reaction.

Download PDF version:

• Investment vs Organic growth, Business & Management magazine, October 2019 (p.25)

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Further reading on early funding decisions is available through the resources below.