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How Evolutionary Capital Helps Second Stage Companies

Small Business Investors

You’ve heard of Venture Capital.  You’ve heard of Private Equity.  But have you heard of Evolutionary Capital?  It fits uniquely in between, in the second stage of growth.

When you finally rise above the difficulties of being a start-up, your small business starts its transition into the second stage, where the challenges of scale begin.

It can be an intimidating and overwhelming period for entrepreneurs and business leaders, even after a company has begun to establish itself in its industry. Like you, we at Evolution Capital Partners have gone through this kind of experience as entrepreneurs, and it has shaped our roles as small business investors and partners in second stage companies.

What is a Second Stage Company?

While the number of growth stages a company goes through can be numerous, the second stage can be the most critical. In a nutshell, your business has evolved past the start-up phase (and for this you should be congratulated!), and has earned the unique status as an established, profitable organization.  Now the challenge is maintaining that status while continuing to grow.

What got you to this point, may not get your company through this next phase of growth.  And unfortunately, the odds are often stacked against you.  Dr. Gary Kunkle, founder of Outlier LLC and Research Fellow at Business Dynamics Research Consortium, discusses on an episode of The Second Stage that sustained growth is in fact rare.  He sites that as low as 1-2% of all business establishments experience growth as little as 2 out of 5 years.  Astonishing, yes, but there is good news.  There is the opportunity to learn and evolve as your company grows.  Growth is in fact a learning process and there are proven systems and best practices to take your company successfully through to the next level.

Noted by famed author and business consultant on sustainability and growth, Jim Collins, in his book Great by Choice, there are known characteristics of what he defines as 10Xers.  10Xers being companies that don’t merely get by or suddenly become successful, they truly thrive through various economic scenarios.  They beat their specific industry indexes by at least 10 times.

Two of these characteristics include:

  • Build Cash Reserves – 10Xers have a fanatic discipline to build and maintain cash reserves and buffers for unexpected future events (both downfalls and opportunities).
  • Find Your Purpose – The leaders of 10Xers channel their ego and intensity into something larger and more enduring then themselves.

To these points, this is how the principles of Evolutionary Capital were established.  Evolutionary Capital includes the science of smart investing, working hand-in-hand with the clever integration of proven business best practices.

What is Evolutionary Capital?

business growth investment to achieve goalsFew companies experience aggressive growth without a capital investment.  However, even a strong financial shot in the arm doesn’t mean your company is guaranteed to expand. It takes a lot more than mere capital to scale an organization – and this is what Evolutionary Capital represents.

Evolutionary Capital brings to the table a distinct grouping of investment goals and principles developed over many years, specifically tailored for second stage companies and their leaders.

The Goals of Evolutionary Capital:

  • Invest sufficient growth equity capital to reach the entrepreneur’s vision and goals
  • No or limited bank borrowings (never any personal guarantees)
  • A strong balance sheet
  • Free management to work ON the business, instead of just IN the business
  • A foundation for sustained growth through the implementation of The 5 Pillars of Business FreedomSM, which consist of:
    1. Great Financials
    2. A shared Plan
    3. The attraction and retention of the right People (a cohesive team)
    4. A culture of Transparency
    5. A culture of Accountability
  • Allows a company to find its purpose, creating a sustainable organization that impacts the lives of the community, employees and management.

However, a second stage company will have a difficult time evolving without the right kind of leader.

Is Evolutionary Capital Right for Your Small Business?

While Evolutionary Capital addresses the issues keeping second stage companies from experiencing significant growth, not every small business is prepared for the transition. Evolutionary Capital requires a leader who’s not only ready for their company to make that next leap forward, but is a continuous learner, prepared to build a cohesive team around them and open to embracing a partner to get there.

Typical investment situations include:

  • Management has a vision for the company, but the current owner(s) is happy with a profitable lifestyle business (Management Buyout)
  • A partner may not share your vision for the company, so you need capital to buyout their interest in order to scale the business to its full potential
  • Insufficient working capital is available to hire an identified “dream team” to scale the business
  • Cash flow is being used to pay off outstanding loans, unavailable to make necessary growth investments
  • A geographical expansion or strategic acquisition approach requires additional talent and capital

Do you see yourself or your business in any of the above scenarios? Then Evolutionary Capital could very well provide you with the solution for small business evolution. Contact us today to find out what Evolution Capital Partners can do for you.

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Posted by: Brendan Anderson A co-founder and managing partner at Evolution, Brendan has spent the past 20 years as an investor and manager of businesses ranging from manufacturing to financial services. @Brendan_Andersn

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