There is always a lot of excitement around start-ups. After all, everyone wants to get in on the ground level of the next Facebook. That's why angel investing is so popular for high net worth investors, and why venture capital is seen as a sexy career choice.
We read a great article this week by Andy Rachleff, president and CEO of Wealthfront and an experienced venture and angel investor. Rachleff argues against angel investing and claims that most venture funds create no value. He cites this now famous Kaufmann Foundation research and a Cambridge Associates study in saying that, "only about 20 firms--or about 3 percent of the universe of venture capital firms - generate 95 percent of the industry's returns."
This got us thinking. If venture capital and angel investing were largely unsuccessful, who would be best positioned to build businesses? While individual entrepreneurs can create small businesses with their own capital, what's the best way to build big businesses, and build them quickly?
We believe the best place for building a big business venture is within the companies that we write about: Inc. 500|5000 companies. Here's why:
1. These companies are already experienced managers of growth and growth capital, and they don't have the bureaucratic organizational challenges of larger companies.
2. They are large enough--more than 75% of the Inc. 5000 generates more than $5 million in annual revenue--to quickly scale a new business.
3. They have developed unique capabilities and strategic assets in their industries, which can be leveraged into developing adjacent businesses. They are not mere start-ups with a "good idea."
4. Their core business and growth provides good access to capital, including lower cost debt funding.
Our sense is that traditional venture funds aren't the right groups to create rapid, sustainable growth. Most successful venture firms are good at placing bets and managing a portfolio. Executing a strategic growth path takes a different set of skills, such as building a management team, identifying strategic opportunities, and delivering on specific key milestones. Growth companies, especially those in the Inc. 500|5000, are a prime source of these skill sets.
Given that our firm, Avondale, is engaged in partnering with investors and middle market companies to find new growth engines, we are putting our money where our mouth is on this topic. Similarly, many of you run growing companies and have sources of growth, in the form of new business models, within your market segments. We would encourage you to find and invest in new ventures within your sector and create the next venture success.
Share your thoughts and questions about building a venture within your company with us. We can be reached at firstname.lastname@example.org.