What’s a great way to accelerate sales and job growth for your company? A private equity investment or, even better, venture capital funding can translate to significant growth for small and medium-sized businesses, according to two finance professors who studied thousands of workplaces with 500 or fewer employees. The fact might seem like a no-brainer, but the data are dramatic.
One caveat: Securing that kind of financing can be especially challenging if you’re a minority, female, or foreign business owner, the study showed.
The publication, Did they build that? The role of private equity and venture capital in small and medium-sized businesses, released by the Institute for Exceptional Growth Companies and Pepperdine University’s Graziadio School of Business and Management, documents Graziadio professors John Paglia and Augus Harjoto’s research into the performance of more than 8,000 workplaces that had received such financing between 1995 and 2009.
Their study showed that, versus similar non-backed companies, venture capital recipients generated 846 percent greater revenue growth over five years following a financing. Those companies also created 608 percent more new jobs than comparable companies that went without VC financing.
Recipients of private equity saw less astounding results, but still performed better than non-backed companies. They generated 129 percent greater revenue growth and created 257 percent new more jobs than the control group.
While companies that receive private equity experience growth gradually, venture capital can have an immediate impact on a company’s growth, the professors reported.
They also reported data indicating that some business owners face greater challenges securing private equity and venture capital than others. Foreign-owned establishments receive private equity at a rate 39 percent less than U.S.-owned companies, and get venture capital 46 percent less often. Minority owners get venture capital 35 percent less often than non-minority owners, and get private equity 13 percent less often. Female business owners are backed by venture capitalists 23 percent less often than males, and get private equity 4 percent less often.
The report did not investigate the reasons for those biases, or suggest how to overcome them.
To read the full report, see Did they build that? The role of private equity and venture capital in small and medium-sized businesses.