Delivered February 15th, 2018. Contributors: Megan L., ChristineD and
Venture Capital - Middle Market
In addition to looking for a venture capital (VC) firm that can provide funds, middle and lower market companies want to find a firm that will provide extensive knowledge of the company’s industry, and can provide business networking connections for future employees and clients. Further, they look for a VC firm that will provide them with a long-term partnership, as the two entities will be working together for numerous years. Below is a brief overview of what a company looks for in a VC firm (including added value aspects they consider important), as well as more specific components they want to see within a VC.
OVERVIEW OF ADDITIONAL COMPONENTS
Beyond the obvious support of financial needs, a venture capital firm (VC) can provide credibility, or what some call “social proof”, e.g. “demonstrable evidence that a renowned investment firm with deep pockets is backing your company.” This in turn will help the business attract top quality clients and employees. They also look for a VC firm that can match the type and longevity of the funds they're looking for by analyzing the VC firm's past clients. Questions to consider include "what is the average investment amount, and what kinds of investment opportunities does the VC work in (e.g. sectors, startups)?"
Further, it’s important to choose a VC that the company can appreciate and value as a partner — the two entities will most likely be working together for many years, so finding compatibility is beneficial for both parties.
There are also “added value” aspects that companies look for when choosing a VC, e.g. what qualities and “extras” does the VC have that can be beneficial to the business? Examples include:
“Strategic and tactical advice on the [company’s] industry and business.”
“Operating support…and credibility and validation in the eyes of the public, by having a well-known strategic investor.”
“Ability for the company to tap into the global connections and in-house expertise of the parent company.”
KNOWLEDGE OF YOUR MARKET
It’s important for the VC to have extensive knowledge of the company's market. Having an investor invest in the company with “smart money” not “dumb money” is key. Dumb money refers to investments from a VC that isn’t industry-specific, whereas smart money is choosing a VC that has direct experience and knowledge of your company’s business. For example, take the company BodeTree, which is in the banking and small business industry. Their investors “are either former bankers or have strong ties to the industry, bringing a unique perspective on what it takes to succeed in that space.”
After the business and financial transactions have taken place, middle and lower market companies also want a VC to provide further business networking connections. This could be in the form of helping connect the company with new customers, advisers, or employees. These connections tie back into the importance of choosing a VC with knowledge in the company's market — they’ll have better connections that are directly aligned to the company’s industry and objectives.
As previously noted, looking at a VC as a partnership is extremely important for companies – they’ll be working with each other for a long time, and it’s important to make sure the two are compatible. Things to keep in mind include the behaviors of the VC members during initial discussions (“were they nice, pushy, able to listen, strong-minded, etc.")? Further, what kind of support will they provide you throughout the longevity of the partnership, and do they have any major weaknesses from past clients that need to be taken into consideration?
A middle to lower market company wants to find a VC firm that not only provides them with necessary funding, but also one that can withstand a partnership of numerous years, looking for qualities that are compatible with the company’s values and standards. Extensive knowledge within the industry is important, as it can also lead to business connections to find further qualified advisers and employees. Finding a VC firm that can strategically align with the values and goals of a company’s objectives will set-up both entities for success.
One of the pain points of lower middle to middle market companies is the difficulty involved when they need to infuse funds into their coffers in order to fund their business activities for further growth. Since these companies are not large enough, it will be a challenge for them to close funding deals with capital providers. Securing traditional bank loans or other credit lines is not a solution either as the amount that they can get from these sources may not be adequate to build a reasonable business capital.
Middle market businesses have to operate with discipline in their financial planning and execution processes due to the limited resources that are hard to come by. They are often left out of government subsidies that are usually meant for enterprises that are below their scale. On the other hand, they are too small to rise above the ups and downs of the usual business environment.
Another concern that medium players have to contend with are the government regulations. These directives by government entities and elected officials often overlook the specific requirements that are applicable to mid-level companies. As mentioned above, these companies were also excluded from government subsidies because of their relatively larger sizes compared to smaller enterprises who are entitled to government support. As such, middle market businesses have to work closely with government officials to somehow find ways to adjust to these regulations.
MANAGING GROWTH AND EXPANSION PLANS
In every business, every expansion comes with associated risks. However, for middle market companies, the risks are significantly higher than those experienced by bigger companies. The former usually don’t have a big reserve of resources to dilute the impact of negative risks associated with expansions. For example, a mid-market company might plan to expand into a new product category but it has yet to nurture a good relationship with new sets of customers. Customers might not buy the new products yet so sales might take a long time to build up and the company’s cash flow might be impacted. Same with expansions into new territories where customers might not know the products yet and hence, they might be hesitant to buy the company’s offerings.
Also, companies of this size usually do not have a process to prioritize their expansion projects. Related to their issue on human resources and access to capital, they have lesser number of people and financial resources to support these product innovation projects.
Middle market companies will then need to assess their resources and do due diligence before moving into unknown spaces so as not to limit their growth.
ATTRACTING AND RETAINING TALENT
Attracting and retaining talent is another area where middle market companies are having it tough compared to their larger counterparts. Due to their limited resources, their compensation and benefit packages are usually below the levels offered to employees of bigger firms. As compensation is one of the main factors of talent retention, the middle market companies are usually experiencing skill shortages. In fact, the National Middle Market Summit Report revealed that only about half of these companies stated that they have access to the skilled employees that they need and the recruiting clout to attract that talent.
OTHER MIDDLE MARKET COMPANIES’ CHALLENGES
Aside from the major ones above, Techaisle, a market research organization, also released the result of its 2016 survey on mid-market companies. Some top pain points in the survey results were incorporated in the major issues above as well.
The survey revealed the following as top issues that middle market companies face: (1) improving quality of product and services, (2) improving workforce productivity, (3) attracting and retaining new customers, (4) increasing profitability, (5) increasing business growth, (6) creating innovative products, (7) digital marketing, (8) reducing operational cost, (9) managing uncertainty, and (10) improving speed to market.
In terms of IT challenges, these companies count the following: (1) mobility security, (2) budget constraints, (3) finding qualified and trained people, (4) excessive data growth, (5) maintaining current IT infrastructure, (6) regulatory compliance, (7) implementing accelerating cloud computing, (8) mobile devices' management, (9) mobility solution demands and devices, and (10) data protection/recovery/business continuity.
Middle market companies have to contend with unique concerns that are mostly applicable to companies of their size. Some pain points that these businesses encounter involve exclusion from government regulations, problems in their planning and execution processes, limited access to capital, reduced capacity to attract and retain talented human resources, and exposure to higher levels of risks when expanding to new markets.