What are the companies we can best help?
“I get it. You’re right here. That’s the perfect place to be. Those guys need the most help.”
Several months ago I had lunch with a former colleague -- one whose judgment is exceptional, in my view. As I was telling him about the company, he took out a napkin and drew this little diagram, pointed to the area I’ve circled in red and made his statement.
AR No AR
B2B HERE -
B2C - -
I’d never really thought about it quite that way, but yeah, that pretty much summed it up -- in that they are emerging and high-growth companies run by terrific entrepreneurs. I’d say he nailed it exactly.
What these companies have in common is that they need a lot of working capital to grow -- and the faster they grow, the more working capital they need. Working capital is, of course, our expertise.
So, beyond the personal qualities we look for in the entrepreneurs we back (Exceptional Entrepreneurs) and the opportunity to add a lot of value to those entrepreneurs (Equally Exceptional Value), what else exactly do we look for in their companies?
When you work through the math, our capital generally starts making financial sense (i.e. adding to an entrepreneur’s wealth) for companies when they are growing at about 5%. The faster the growth beyond 5% (and almost all do grow much faster), the better a working capital facility from Fundamental works for the company. We seek high-growth situations because we want to add as much value to the companies we back as possible -- and funding growth does that best.
B2B (business-to-business) companies are the ones that require working capital. B2C (business-to-consumer) businesses generally don’t. The simple reason being that serving business customers almost always requires maintaining a large inventory and offering extended payment terms. Some companies actually do both -- they sell to both businesses and to consumers. We’re generally a good fit so long as at least the majority of sales are being made to other businesses. In most cases, B2B companies sell exclusively to other businesses. These companies are the best for us because the working capital need is greater when the focus is on selling to other businesses, and working capital is what we do best.
We generally provide financing in the range of $100,000 to $10 million. The reason for this range is mainly that it tends to align on the low end with companies that have at least $500,000 in revenue -- enough for a financing from us to make a real difference for the company. On the high end, it’s up to around $50 million in revenue, at which point companies should be stable and/or slow-growing enough to find bank debt adequate.
We want to back companies located in the United States and Canada. This is home and where we have spent our professional careers. We know how business works in North America. So we stick to the familiar when it comes to geography.
Where we work does matter when determining whether or not Fundamental is a good fit for you and your company. It doesn’t matter as much as being an exceptional entrepreneur or our solution being able to add tremendous value to your situation, but as we’ve found over the years, it does matter.