The payoff for nonfamily members willing to invest in a new venture can run the gamut from high return on investment to more work for investors’ companies.
As a pediatric nurse, Sheree Mitchell saw a great need for a quality child development center in her hometown of Columbus, Georgia. So in 1988 she quit her nursing job to build and open The Growing Room Child Development Center. The start-up cost was $1.2 million.
“When most people hear you’re going to start a child care center they think you’re starting in your house. We started in a 12,500-square-foot building that we owned,” Sheree says, adding with a laugh, “I said, ‘If we’re going to go down, we’re going to go down big.'”
She and her husband scraped together every bit of money they could because they wanted to own controlling interest in The Growing Room. But they gave up some equity to private investors in order to raise the capital for the 20 percent down payment for a government guaranteed real estate loan.
“These weren’t friends. They were local businesspeople who had a lot of faith in me,” Sheree says. “I grew up in Columbus. The community isn’t that big [186,000 people]. Everybody knows everybody.”
Some of the outside investors were involved in constructing the first Growing Room child care center, she adds. They calculated that they would get some of their investment back by participating in building the project. Nevertheless, Sheree asked her attorneys to draw up a prospectus of The Growing Room as a company worthy of investment.
Once an entrepreneur decides to seek outside equity capital, the business stakes rise significantly. The company must have a quality business plan, good management experience, and reasonable expectation not just of survival but also of big success. Equity investors aren’t putting up cash for altruistic reasons. They might accept more modest return on investment if they see a civic need, as Columbus had for a quality child care center, but they still expect a profit. Often these equity investors come from the ranks of suppliers, as they did for The Growing Room, or complementary businesses that have a natural working relationship with the new venture. But anytime you’re giving up some equity in your business, hire an experienced business attorney to draw up and review all documents.
Even though Sheree had never owned a business before, she could capitalize on her experience as a registered nurse and pediatric specialist. She had an impressive business plan and could tell investors precisely how she would use their money to start and grow The Growing Room. Any start-up going after other people’s money must provide more concrete facts about their ventures than the firm financed by the founder alone. However, that level of detail benefits a new owner like Sheree who lacks actual management experience.
Sheree’s assessment of the market was accurate. The first Growing Room opened in August 1989 with 221 children. In 1996, Growing Room Too opened. In 2002, supplemental insurance company Aflac Inc., one of the city’s largest employers, contracted with The Growing Room to run its two corporate child care centers. The Growing Room’s staff doubled in one weekend with that expansion. In 2004, Cascade Hills Church contracted with The Growing Room to refurbish and run its child care center, expanding Growing Room’s total staff close to 200 and enrollment to 1,300 children.
Brandon is a finance consultant and part time blogger who has written this article for Tom Gores Chairman and CEO of Platinum Equity, a private equity firm headquartered in Los Angeles.
