For an entrepreneur with a great new idea that they believe will change the world and empower consumers a dragon’s den style pitching event can seem like a great opportunity to tell the investment community all about it. The lure of potential investment together with access to incubators and accelerator programs is waived in front of entrepreneurs keen to attract the capital to execute their idea. The model is set up to encourage entrepreneurs to come up with new ideas in the hope that they could be the founder of the next tech ‘unicorn’.
This model is so appealing to entrepreneurs and has been made into prime time reality television shows exactly because the reality of raising money as a small company is often so difficult. During the early stages of building a business, most entrepreneurs are focused on delivering for their customers and spend blood, sweat and years refining and improving their product or service to meet the demands of their market. But to scale, to get bigger, most will need to go out and raise money, and this often means stepping outside their comfort zone and selling to a customer they are unfamiliar with and who’s needs they have little understanding – the investor.
The way the funding ecosystem is set up for entrepreneurs can make raising money a soul destroying experience. On the reality TV shows and in the tech press optimistic entrepreneurs with a new widget, app or business idea pitch to experienced investors who make an informed decision, write you a check and offer you the promise of guidance and support as you build your business. Unfortunately, the experience of most entrepreneurs is very different.
Pitching to investors can be a long and dispiriting process involving cold-calling numerous venture capital and high-net-worth investors and trying to raise money through the strength of your pitch. Often, rather than speaking to a senior investor, you end up pitching to junior staff who don’t understand your business or the market in which you operate.
If you get through the pitching process and are finally successful, the money often comes at a valuation that is far lower than you expected or with such onerous terms that you wish you hadn’t bothered in the first place. To be fair to those investors, they do need to protect themselves since backing a small business is risky and their investment will be highly illiquid. But the strings often attached to a deal frequently create tensions between entrepreneur and investor and can prevent the type of calculated risk-taking and creativity that is necessary when building a small business.
So for an ambitious entrepreneur looking to raise capital and build their business what are the other options? One is to sell out to a larger company through a traditional M&A transaction, yet this often means losing control of a company that they have spent years to build. Another is an IPO which offers access to the huge pool of public market investors, but most founder-led businesses are far too small to make this a workable solution.
This leaves small business entrepreneurs jumping through hoops for investors in return for a bad deal. But raising capital and building your businesses doesn’t need to be so hard. The answer – a co-operative approach called Agglomeration, which involves a group of small businesses, within the same industry, coming together under a central holding company that then goes public on a major global stock exchange.
Each entrepreneur swaps private stock for public stock in the holding company but continues running their business just as they were before. Their brand, their hiring and investment decisions remain under their control. Unlike in a traditional M&A buy-out, synergies and company culture are not forced on member companies, but instead, successful business owners are empowered to keep doing what they have been doing so successfully, but now with a platform on which to aim even higher.
First, an Agglomeration is a great way for small businesses to access the huge pool of capital available to publicly listed companies all over the world. By grouping small businesses together, vehicles can be created that are big enough and interesting enough to attract investors and that have shares liquid enough so that investments can be made and exited freely, making the investment a far more attractive proposition.
Having public stock is also a game changer for the individual small business owners. As well as being able to actually track their own personal wealth in real time, they now have a viable currency with which to attract senior staff to join them and help them grow. Also, many small business owners would love to buy up their competitors locally or globally but need the cash to do so. Within an Agglomeration, each entrepreneur has the publicly listed stock of the Agglomeration to use as a currency to add products and talent through acquisitions.
A public listing within an Agglomeration also offers the entrepreneurs a degree of liquidity which means they can extract some cash from their companies while still retaining control and leadership. They gain financial freedom without giving up the company they have worked so hard to build.
Agglomeration means “to form a cluster” and it is an idea aimed at addressing a broken investment universe that prevents small business raising the capital they need to build their businesses. By empowering talented entrepreneurs and giving them the tools they need to succeed Agglomeration has the potential to change the way smaller enterprises grow and create value in the future.
With a long career in entrepreneurial mergers and acquisitions, Jeremy Harbour developed a new model: Agglomeration. In his book, Agglomerate: From Idea To IPO In 12 Months, explains the model and how it can be used for business owners around the world. The book is co-authored with his business partner, Callum Laing. These are two entrepreneurs who have focused on helping business owners to be more successful through unlocking the value in their shareholding.