- Focus on Value Creation Over Value Extraction
- Favor Long Term Thinking Over Short Term Thinking
- Embrace Fragmentation as Opposed to Concentration
- Be the Preferred Counterparty to All the Stakeholders of Your Business
I want to make an observation about some behavior that we see locally (and elsewhere) because we have a vested interest in seeing it change in the future: Self-interest, if taken too far, can be toxic.
The term self-interest may be more commonly used as pejorative these days. Alexis de Tocqueville called America’s genius “self-interest rightly understood”. At Localize Capital, we believe that “self-interest rightly understood” is alive and well among Pittsburgh's family businesses. These businesses focus on survivorship and sustainable growth by maintaining a long-term focus and stakeholder-centric approach. They do well by doing good. Somehow, there seems to be a disconnect between this proper self-interest and how new business formation and growth is fostered and financed in this region.
Western Pennsylvania is home to some staunchly independent, closely held, cash flowing businesses. These companies are amazing assets to the region, offering stable employment and intentional community structure. While we respect any business owner’s decision to sell their company, we admire business owners in this region who forgo outside capital and optimize for longevity. In our estimation, far too few resources are aligned with entrepreneurs who envision this path to success.
We believe the region's wealth is eager to support this path to success, with an understanding that some of Pittsburgh's great fortunes were accumulated by voraciously serving customers in fragmented markets. These businesses relied on strategies and assumed risks associated with a business plan geared toward generating profits and returning capital through distributions.
A large proportion of regional resources are aligned with the high growth/high risk models associated with venture track companies. These models of rapid enterprise value creation include the intent of selling the business at an opportune moment. What is missing in the market are more diverse financing options that support entrepreneurial growth without the financial return being dependent on a liquidity event. There is no singular right or wrong approach; different personality types, time preferences, business models, and addressable markets should dictate the financing mechanism. However, if there is no choice, then the financing mechanism dictates the strategy.
Our intent is not to deride exit-based investments, which are necessary for certain business models, but to suggest that diversity of capital structures and sources suitable to other business models could benefit local investors, local entrepreneurs, and our region’s economy at large. Groucho Marx said, “I refuse to join any club that would have me as a member”. The irony is that some of the best investment opportunities in this region could be in the companies who desire independence. Creating opportunities to invest in the next generation of independently minded entrepreneurs who are pursuing “self-interest rightly understood” is an opportunity worth pursuing. Building a bridge consisting of both capital and guidance between established private businesses and this next generation seems like a natural place to start.
There is no singular right or wrong approach; different personality types, time preferences, business models, and addressable markets should dictate the financing mechanism. However, if there is no choice, then the financing mechanism dictates the strategy.