Private equity firms have traditionally been seen as a powerful source of funding. However, the perks of working with an experienced small business investor extend well beyond raising capital.
When thoughtfully and strategically selected, they serve as powerful assets for driving revenue through a combination of inorganic and organic growth strategies.
The Differences Between Inorganic and Organic Business Growth
Inorganic growth can be defined as any growth that stems from external resources. Examples include opening new locations, purchasing a competitor’s business and merging it with your own, or raising private equity from a small business investor.
Organic growth is anything that’s driven by internal resources that are already held in the business. This may include operations, sales and distribution, customer relations, product development, or even content and branding.
Typically, the average small business owner looks to investments primarily as drivers of inorganic growth. But in reality, these small business investors are just as much about improving systems and processes. You can learn more about small business investing from a company like ValueStreet.
In a perfect world, the investor and business partner together to leverage expertise, implement internal changes, and fundamentally improve everything from innovation to sales to distribution with an end goal of long-term, sustainable growth in mind. To understand the well-rounded approach in how small business investors help companies increase both revenue and profits, it’s helpful to explore both sides of the coin.
Using Inorganic Growth to Drive Revenue and Profits
Private equity can fuel business growth in a variety of ways. In fact, one of the most appealing aspects is how it can be used simultaneously in numerous capacities to help businesses make significant improvements such as gain access to untapped markets, integrate new technology, add more product lines, expand existing services and even setup franchising or licensing agreements.
Likewise, small business investors can also help a business achieve growth goals by acquiring a competitor and/or adding new products through a merger and acquisition.
Perhaps the biggest benefit to external growth (when contrasted with internal growth) is speed. It’s arguably the fastest and most efficient way to expand a business. It’s also an effective means of reducing competition through strategic acquisitions.
However, we must touch on some of the disadvantages. Typically, it’s going to require more capital and involve a lot more risk, and small business investors realize this.
Acquiring or merging new companies or markets is usually much more expensive than the initial projections suggest. Not only does it come with large upfront costs, but there’s always friction with integrating management styles, processes and systems.
From a human resources perspective, trying to merge cultures and teams together can be a real administrative nightmare. And while inorganic growth can be fast, you don’t always have total control over the direction it takes. At the end of the day, it requires an investment of financial capital and human capital.
Using Organic Growth to Drive Revenue and Profits
There’s a case to be made for organic growth, as well. In fact, organic growth is typically the best measuring stick for the overall performance of a company. If a business is growing organically, it’s a clear sign that something is working well and resonates with customers in the marketplace.
As previously stated, organic growth stems from within the organization’s internal activities. It can be calculated by looking at the increase in sales output, as well as improvement in areas like production speed and efficiency.
Small business investors have the ability and opportunity to improve a company’s internal capabilities by advising on critical areas like marketing, branding, product development and even operations. The end goal is to drive bottom-line revenue growth, while simultaneously increasing profits.
Even incremental improvements in areas like distribution, sales, and production can net significant improvements in profitability via cost reduction. Also, small business investors have the ability to affect internal growth through strategic changes to service delivery.
When services are more reliable, companies can provide more value to customers, increase loyalty, and, in turn, drive more revenue. Finally, with an appropriate marketing and branding strategy in place, small businesses can see significant growth in market share.
The biggest strike against organic growth is that it happens much more slowly than inorganic growth. However, when the right pieces are in place, it’s usually more consistent and sustainable over the long haul.
Small business investors pursue healthy and sustainable growth that reflects their long-term commitment to the companies with which they partner. For small businesses that are willing to look three to five years or more down the road, the organic growth approach ends up being far better for the company.
Organic growth is often considered more difficult to achieve. A private equity partner offers the value-added benefit of enhancing your business’ existing internal resources. Small business investors bring new skills, specialized knowledge, deep industry experience, and valuable relationships.
With a strategy based on everything from your competition to industry trends, to your financial capacity, small business investors provide their clients with a detailed blueprint for driving organic growth in the most strategic way possible.
Developing Your Own Growth Strategy
If a small business isn’t growing, it’s falling behind. And because there’s no such thing as standing still, it’s true to say growth is vital to every company. But what’s the right kind of growth look like?
While there are business owners who say “growth is growth,” the reality is small businesses must take a strategic approach and find the appropriate balance between both organic and inorganic growth. In fact, you could say successfully navigating that growth is one of the keys to scaling up with efficiency.
At the risk of sounding elementary, not all growth is created equal. If there’s excessive organic growth, a business can lose its focus and become watered down to the point that there’s no expertise. A business can also lose its audience by trying to be all things to all people. On the other hand, too much inorganic growth can leave a business dependent on outside factors that are ultimately uncontrollable.
This leads to its own host of issues. At the end of the day, it may be wisest to partner with the right small business investors to facilitate intentional and sustainable growth strategies through a combination of both organic and inorganic means.
The best strategies incorporate a balanced approach that’s centered on accelerating growth through a diversified revenue base. The right partnerships pave the way for both short- and long-term solutions that preserve and build upon a small business’ strengths to enhance multiple revenue streams.
It’s up to each individual business to define what healthy growth and success look like for them. Based on this ethos, it’s worth considering whether or not a small business investor is the right strategic growth partner for you.