Understanding why organic businesses without substantial outside capital often have better business fundamentals and greater exit opportunities
Across the digital media and technology vertical, companies are constantly raising capital to expand and grow their brands. Whether you turn to TechCrunch, Recode, or other industry publications, it seems that unless you are raising a substantial amount of capital or are on your Series E investment, your company is not growing at a pace to attract the attention of potential acquirers. Recently, however, there has been a strong appetite from both corporate and financial acquirers to seek out and buy businesses that have been bootstrapped or never raised an outside round of capital. So what is driving this trend?
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Platform Piggybacking to Scale
As the growth of technology-enabled companies continues to disrupt established incumbents, newer businesses have been fortunate to benefit from several trends enabling them to take advantage of network effects and grow quicker without the substantial capital investments that had been unavailable to earlier companies. We have seen substantial network effects occurring in the eCommerce and media sectors, where companies have been able to leverage the platforms of Amazon, Google, and Facebook to create scale with no outside investment.
These eCommerce savvy businesses utilize their infrastructure and digital expertise to monetize at a much earlier stage, while not having to invest the significant capital typically needed by traditional businesses to build the infrastructure required to get a business to scale. We recently advised two businesses which took advantage of the scale provided by larger digital platforms to grow without taking substantial capital from outside parties. Both companies created successful brands and utilized various platforms to scale their growth parabolically in a capital efficient manner.
Rapidly-growing direct-to-consumer deodorant brand Native used Facebook as a primary customer acquisition engine, generating substantial ROI on each dollar spent, a strong driver for Procter & Gamble’s (P&G) acquisition thesis. We knew that the Native story and brand would generate strong excitement and acquirer interest while allowing P&G to broaden its existing portfolio of personal care brands, such as Secret, Old Spice, and Gillette by capitalizing on the direct-to-consumer and better-for-you positioning of the Native brand.
Bear Down Brands, a rapidly-growing developer and marketer of branded home, health, and wellness products, piggybacked on Amazon’s global fulfillment footprint to grow their business into a top 10 Amazon seller account within five years of launching their Pure Enrichment and Bentgo brands before partnering with a consumer product-focused private equity firm.
These are but a few examples of companies that decided to invest in their brands and marketing instead of overhead and infrastructure to realize significant growth and substantial outcomes for their shareholders. Had they raised millions of dollars from outside venture or growth equity firms, their outcomes could have been very different as it may have limited the interest of select groups and may have altered the timing and trajectory of an exit.
This article highlights several other key themes, such as:
- The Benefits of Bootstrapping
- Creating Additional Optionality
- Digital Businesses Are Created to Sell