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Evolutionary Capital: Supporting Second Stage Companies and Their Leaders

By Jeffrey Kadlic | Last updated: June 16, 2017
Presented by Evolution Capital Partners
Key Takeaways

Evolutionary capital may be what your second stage company needs to get to the next level.

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"Evolutionary capital" fits squarely between venture capital and private equity in the second stage of a company’s growth. Unlike venture capital, evolutionary capital supports those entrepreneurs who have beaten the odds of the start-up phase and earned the unique status of being an established, profitable organization.

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As defined by the Edward Lowe Foundation:

"Second stage companies are no longer concerned about survival. And in contrast to lifestyle entrepreneurs, second stagers are significant job creators."

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For this alone, these businesses should be congratulated, as it is often noted that 90% of start-ups inevitably fail.

The Challenges of Evolving an Organization

Now, while many hurdles may have been passed, with the next phase of growth comes its own set of unique challenges. What may have worked for the entrepreneur up to this point, isn’t always going to be effective in taking their business to the next level of success.

Dr. Gary Kunkle, founder of Outlier LLC and Research Fellow at Business Dynamics Research Consortium, spoke to this point on an episode of "The Second Stage," when he said that sustained growth is in fact rare. During the discussion, he cited that as low as one to two percent of all business establishments experience growth in as little as two out of five years.

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Astonishing, yes, but there is good news. There is the opportunity for these second stage companies and their leaders to learn and evolve as their company continues to grow. Growth is in fact a learning process, and there are proven systems and best practices to take a company successfully through to the next level.

A Proven Approach to Sustainable Growth

Famed author and business consultant on sustainability and growth, Jim Collins, noted in his book, "Great by Choice," that there are known characteristics of what he describes as "10Xers." By Mr. Collins’ definition, 10Xers aren’t companies merely getting by or suddenly becoming successful, they are those that truly thrive through a wide range of economic scenarios. Essentially, they beat their specific industry indexes by at least 10 times.

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Two of these characteristics include:

  1. Build Cash Reserves – 10Xers exhibit a fanatical discipline to build and maintain cash reserves and buffers for unexpected future events (both downfalls and opportunities).
  2. Find Your Purpose – The leaders of 10Xers channel their ego and intensity into something larger and more enduring than themselves.

To these points, this is how the principles of evolutionary capital were established. It includes the science of smart investing, working hand-in-hand with the integration of proven business best practices.

A Foundation for Scale

Few companies experience aggressive growth without a capital investment. Still, a strong financial shot in the arm doesn’t mean a business is guaranteed to expand. It takes a lot more than mere capital to scale an organization.

The goals of Evolutionary Capital include:

  • Invest sufficient growth equity to reach the entrepreneur’s vision
  • No or limited bank borrowing (never any personal guarantees)
  • A strong balance sheet
  • Freeing up management to work on the business, instead of just in the business
  • A foundation for sustained growth through the implementation of The 5 Pillars of Business Freedom(SM).
  • Letting a company find its purpose and create a sustainable organization that impacts the lives of the community, employees and management.

Is Evolutionary Capital Right for Your Business?

While evolutionary capital addresses the issues keeping second stage companies from experiencing significant growth, not every small business is prepared for the transition. Evolutionary capital requires a leader who’s not only ready for their company to make that next leap forward, but is a continuous learner, prepared to build a cohesive team around them and open to embracing a partner to get there.

Typical investment situations include:

  • Management has a vision for the company, but the current owner(s) is happy with a profitable lifestyle business (management buyout)
  • A partner may not share your vision for the company, so you need capital to buyout their interest in order to scale the business to its full potential
  • Insufficient working capital is available to hire an identified “dream team” to scale the business
  • Cash flow is being used to pay off outstanding loans, unavailable to make necessary growth investments
  • A geographical expansion or strategic acquisition approach requires additional talent and capital

At Evolution Capital Partners, we are honored to partner with a select group of second stage businesses and their leaders to build sustained growth companies. If you'd like to learn more about how a private equity investment could work for your company, we invite you to listen to our webinar here.

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Presented By

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Written by Jeffrey Kadlic

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Jeffrey Kadlic is the Co-founder and Managing Partner of Evolution Capital Partners. He is a private equity professional with broad experience in all aspects of the private investment life cycle with a particular interest in supporting the development of “gazelles”, second stage growth companies and other entrepreneurial businesses in the micro market.

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