Solving the Wealth Creation Conundrum – The Small Capital Acquisition Approach

Small businesses provide a unique opportunity to grow wealth. In fact, they are the primary mechanisms for growing wealth AND distributing that wealth broadly throughout society. Unfortunately, small businesses suffer from poor access to capital. Furthermore, growth strategies are hindered where a starting wealth base is lacking. This is especially problematic for the economically disadvantaged, whether that be individuals or areas.

We believe we have discovered at least one approach to help small businesses, including those that are economically disadvantaged. We call this the Small Capital Acquisition Approach (SCAA). We believe that it has wide application to existing small business, start-ups and even for the economically disadvantaged. We have been testing this approach through the Opportunity Zone Accelerator Program sponsored by the Colorado Office of Economic Development and International Trade (OEDIT).

Wealth grows based on three things:

1. A base of wealth to grow – the basis
2. A mechanism for increasing the value of the wealth base – the growth curve
3. A willingness to “re-invest” a significant part of the increased wealth into the wealth increasing mechanism – the feedback loop

The “secrets” are:

1. Finding the people with the “right stuff”
   1. Bright, dedicated, energetic and motivated about creating wealth and not just consuming it
2. Creating a starting position for wealth growth
   1. Primarily a non-profit or government funded piece
3. Building a wealth growing machine – a for-profit business
   1. The higher the growth rate, the faster the starting point can grow
   2. In partnership with other for-profit partners and investors (including debt and equity partners)

There are many problems with existing wealth growth formulas – including most “incubator” business models. They are especially difficult for start-ups and economically disadvantaged entrepreneurs. These include:

1. Investing in the wrong people

Resources put into the wrong people are wasted. Those who haven’t the discipline or drive to work hard and forgo immediate gratification cannot grow wealth. As soon as the non-profit support runs out, the wealth generating machine collapses.

2. Investing in the wrong ideas

Resources put into the wrong ideas are wasted. Frequently “cool,” “noble,” or “fun” ideas are not economically sustainable. They suck up scarce investment resources because they sound good but never amount to anything. Unless the ideas can be made profitable and self-sustaining, they collapse as soon as the non-profit support runs out.

3. Expecting unrealistically high returns

VC’s and similar “high-risk” funding mechanisms are terribly inefficient sources of capital. Money is thrown at all kinds of nice sounding ideas in the hope that there are a few, quick “winners” to make the investors quick money. They get their money out early on and leave other folks holding bags full of expensive, high-risk losers.

4. Tolerating inappropriately low returns

Far too many “incubators” and government funded economic development activities fund hobbies rather than businesses. The creation of wealth is either non-existent or simply is too low for reasonable investment appetites.

5. Expecting minorities and underprivileged to quickly “bootstrap” to success

The beginning wealth basis is a key success factor. Doubling a very small number is still a pretty small number. An appropriate, at-risk investment is needed for minorities and the underprivileged to get anywhere in a reasonable length of time. It is unrealistic to believe that for-profit investors will make appropriate investments in most minority and underprivileged programs. The risk for them is too great. It is also rare that non-profit and government programs make an appropriate investment. The level of investment is too great for them.

6. Expecting any small business to grow without “sweat equity”

This never happens effectively. The entrepreneur MUST create wealth based, in part, on personal commitment and personally added value. This wealth basis can be “leveraged” with outside investment (debt and equity) to speed growth, but without the personal wealth nest egg the entrepreneur will have to give up too much ownership and will “sell” too much of their personal wealth potential to the first investor that comes along.

7. Ignoring the “feed-back loop”

Early consumption of the wealth generated by business frequently kills that business. Economic growth is always spotty and economic downturns are frequent. A significant percentage to the wealth generated must to re-invested in the business – especially in the early years – to grow it into a healthy, self-sustaining business. This requires owner vision and discipline.

The unique SCAA solution:

1. Create non-profit or government funded programs/organizations that:
   1. Pick the right people
   2. Pick the right ideas
   3. Fill any “gaps” for the people/idea combination
   4. Provide adequate seed money/resources to get the people/idea to a point ready for investment
   5. Assist the entrepreneur in making an effective wealth generating transition from personal investment to outside investment (debt and equity).
2. Create a for-profit organization that:
   1. Takes the investment ready business and finds investors for the for-profit entity. This can be a mix of direct investment and find other investment partners. It should also be a mix of debt and equity designed to grow the business and multiply the wealth generating potential.
   2. Graduate the business to a self-sustaining, highly efficient, wealth generating machine.

We at CC4ICC have applied the SCAA approach quite successfully. One example is the ODEIT OZ Accelerator Program. In our partnership with OEDIT, we developed several unique tools. Many of these were inspired by needs arising from the COVID-19 crisis. These tools resulted in lower costs and higher success rates. Among the tools were:

• Online business data collection through sign-up surveys that made the selection process simpler, cheaper, faster, more objective, and more accurate.
• Online training courses that reduced costs, made review and retraining simple and focused efforts on the key, practical points.
• Consistent online follow-up with businesses in the program to ensure deadlines and milestones were being met.
• Simplified valuation strategies that made it easier for business owners to communicate with potential investors

All these tools are being continuously improved. They can be readily deployed to other economic and business development programs.

For more information contact Ron Stites at:  [email protected] or visit our website at:  www.cc4icc.com.

 

Ron Stites is an inventor and serial entrepreneur. His specialties are start-ups and early capitalization – especially with high-tech businesses. His is a founder of the Colorado Center for Innovation in Community Capital (CC4ICC) as well as several other businesses serving various facets of business improvement, growth and technology development.