Incubators, angel investors and many service providers seek companies poised for exponential growth. They’re looking for talented people with killer technology in markets that have limitless potential. Of course very few companies can actually tick all those boxes.
While angel investors and VCs are looking to invest in scalable, growth companies, small businesses are overwhelmingly concentrated in the services sector and for the most part aren’t scalable…
In 2018, according to Canada’s NATIONAL ANGEL CAPITAL ORGANIZATION, only 6.45% of companies looking for money received any funding. Of these, only about a third will generate returns to investors. The rest of these companies will be written off by investors – and most of these will fold.
In which sectors are small businesses concentrated?
Small businesses in B.C. operate across a number of diverse activities, ranging from family-owned and operated restaurants, to small industrial operations, to self-employed care-givers. However, four out of five (80 per cent) of all small businesses in the province are in service sector industries, the same as the per cent of large businesses in the service sector.
In 2017, the bulk of small business activity in the goods sector was in construction and utilities, which accounted for 14 per cent of all small businesses in the province. Construction is more amenable to small business operations compared to other goods industries such as manufacturing. In fact, the construction trades really resemble service businesses in many ways.
Among the service industries, professional and business services were by far the largest, accounting for more than one in five small businesses (22 per cent). Included in this sector are a number of diverse activities, such as legal services, tax preparation services, marketing, research and industrial design services.
The Art of the “Pivot”
The truth is that some of our most successful companies discovered exciting new markets and/or killer technologies while doing something else. Their success was the result of their ability to recognize the opportunity that they really just “tripped over”.
Consultants and academics in the management field like to call this ‘eureka moment’ a ‘pivot’. Most would like to create the impression that by giving it a name, they can recreate the steps required to ensure a successful pivot. Perhaps some of them can.
Growth Business vs Lifestyle Business
While investors want to invest in high growth businesses, founders may have a variety of reasons for starting a company. In tough economic times people start businesses to build their own jobs.
Many highly-skilled older workers recognize that there can be greater job security dealing with a large customer base than with a single employer. As my father once told me, “the higher your salary, the closer you are to the door”.
While an angel investor might discourage you from starting a “lifestyle business”, the entrepreneur should take that advice with a grain of salt. The angel investor is expressing his preference for a specific kind of business to invest in. Many lifestyle businesses don’t need investors. And equity is always a lot more expensive than debt.
What’s more, most small businesses provide services in ways that are difficult to scale. On the other hand these businesses overwhelmingly require human capital which business owners already possess.
That can reduce the amount of funding required, and provide a reasonable cash flow soon after the business opens its doors. In the case of professional services, practitioners can generally buy existing practices with funding from the vendor.