When you’re evaluating outside vendors or services for your family office clients, is the size of the company you're looking at one of your important considerations?
It was a crucial screen for my late husband, Frank Perdue, the poultry magnate. Before choosing any kind of outside company that he’d be working with, whether financial, design or lobbying, he paid a lot of attention to the size of the company he’d be hiring.
At this point, you might wonder “Why wouldn’t he always go with one of the largest, most prestigious companies? Ones that are dealing with billions of dollars?”
It’s Important to Be Important
The answer is, Frank made a point of assessing how important he might be to the company he was hiring. His thinking was, “It’s important to be important.”
This kind of analysis was among the reasons that Frank was able to grow his company from a father-and-son operation to one that today employs more than 20,000 people.
When it comes to choosing which service providers you recommend for your clients, size does matter. Clients who selects an appropriate size for a company they’re hiring may find that they’re getting more attention than they would if, figuratively speaking, they’re only a small fish in a big ocean. In addition, there’s a chance that a smaller or a mid-size company may be more nimble than the giants.
In the specific case of who’s best for raising capital, your clients may find that instead of going with the largest, most prestigious company, going with a company that relates to how big they are could be their best deal.
However, being important to the company isn’t the only reason for choosing a small to mid-range company when it comes to raising capital.
Advantages of Small to Mid-Size Funds
Cameron and Dean Newton head a mid-size venture fund, Relevance Ventures, and they like to point out that, “Small-to-mid-size funds have a track record of providing greater returns.”
In addition Cameron points out, “With a small-to-mid-size fund, it’s easier to get to the bottom of whether your goals are in alignment. The fee structure of small-to-mid-sized funds better aligns with the goal of asymmetric return. Smaller funds aren’t getting rich off the management fee. They need to drive large returns in order to make the economics work.”
Another advantage is that these funds can offer co-investment options on a scale that’s appropriate for mid-size family offices.
Cameron Newton gives this example: “Suppose a family office has a million dollars to invest, and there’s a $10 million dollar deal. A mid-size fund has the flexibility to allow their client to participate in the fully vetted deal and reap an asymmetric return. In one of the larger funds, you might not get the opportunity, and if you do, then the minimum will certainly be higher.”
Another benefit of going with a small or mid-size firm is regional diversification. “The super-size funds are apt to focus on Silicon Valley, New York and Boston. Small-to-mid-size investment funds are more likely to look at a different regional deal flow, such as in Nashville or Columbus. Often these have real value but may be ignored by the giant funds.”
Including size as part of the screens you use when recommending any kind of outside advice or investing can be a payoff deal. It was certainly a part of how Frank Perdue operated.
Mitzi Perdue is the widow of the poultry magnate, Frank Perdue. She’s the author of How To Make Your Family Business Last and 52 Tips to Combat Human Trafficking. Contact her at www.MitziPerdue.com.