As defined by the 2012 Oregon Capital Scan, the “gap” is defined as undersupplied companies with EBITDA of $500K and $3MM that are void of both financial and human capital – which is a critical component to attract and deploy capital.
Excerpts from the report include:
CAPITAL GAPS
Capital gaps represent a disconnect between the supply of capital and the qualified demand for capital. As a result of a gap, promising companies may lack the capital needed to grow. Capital gaps lead to inefficiencies.It is clear that not all gaps are the same. Some gaps should exist simply because there is no opportunity for investment, while other gaps shouldn’t exist, but do. The gaps that should exist do because the companies looking for investment are not ready or appropriate for investment, either due to a lack of qualified entrepreneurs or weakness in the business plan.
DEFINING A GAP
This study defines a gap as “a lack of capital available to finance a business that has a reasonable probability of success, assuming an efficient capital market.” The use of the term “efficient capital market” means capital will seek out returns, financing promising businesses, so long as capital markets are operating properly.
GROWTH CAPITAL FOR BOOTSTRAPPED BUSINESSES
There are generally two routes that companies take where growth capital becomes needed. The first route is a venture-backed company that has raised series A and B rounds, and is then trying to raise additional capital for growth, perhaps through series C and D rounds. The second path is a company that never received venture capital. Instead, this company has been bootstrapped by the founders, raising money from family, friends and angels, or relying on earnings to finance its growth.
Capital providers indicate there are a number of these privately held, bootstrapped companies in Oregon.
They are generating cash from proven products. While several of these bootstrapped companies have grown quite large, there are many more that have grown more slowly and are generating between $0.5M-$3M in EBITDA. While owners of some of these businesses may have no interest in growth or a sale, many others are looking to grow and/or need some degree of liquidity but don’t have the capital and/or expertise to achieve these goals.
This gap exists for several possible reasons including a) small companies have trouble attracting private equity, b) there is a low awareness of financing options or c) there is a mismatch between the company’s needs and the types of financing available.
HUMAN CAPITAL
It takes more than just financial capital to build businesses. Across every sector, stage and type of business, human capital is a vital component. Quality investing relies on human capital in many forms: entrepreneurs who have grown businesses to achieve significant revenue, managers who have expanded existing businesses, and the keen investor who evaluates risks and opportunities.
INVESTORS
Human capital is not only important with entrepreneurs, but with investors as well. This is particularly true when it comes to investing in early stage companies. Successful venture investing requires significant skill, but it is more than just making the right investments. It is also about adding value to those investments once the deal is done. Quality VCs affect their portfolio companies’ opportunities for success by lending their networks, sector expertise and guidance on the challenges of managing rapid growth. The earlier stage the business, the more important the guidance provided by investors. Some of the best venture investors are those that have been operators (CEOs and managers) of small rapidly growing business themselves. These VCs know what it takes to build and manage a high growth business. They can identify the necessary characteristics for successful entrepreneurs and know how to build strong teams.
