The Power of Minority Investments for Small and Middle-Market Businesses

Securing minority investments can be a valuable option for growing businesses.

Many small and middle-market businesses establish their viability and profitability through a combination of private funding, strategic debt, and plenty of hard work. Taking on minority investors might seem counterintuitive for businesses seeking to expand their horizons while keeping leadership intact, but the array of available options and strategies can make minority investments a beneficial strategy for any size or type of business.   

In this blog post, we examine the ways minority investments can benefit small and middle-market businesses by reviewing some relevant case studies, breaking down strategies to attract and secure investors, and walking through some important legal and financial considerations.

The concept of minority investments for small and middle-market businesses

A minority investment, also known as a non-control investment, occurs when an individual or group of investors purchases a stake of less than 50% in a given business. A minority share in a business of less than 20% of the total is known as a passive minority, with investors usually having little to no say in business decisions, whereas an active minority stake of 21% or more usually translates to greater influence and day-to-day involvement. Types of minority investments include:

● Seed financing – Money is invested to fund the growth of an early-stage or startup company, typically supporting activities like product development, market validation, and team expansion.
● Crowd-sourced funding – New businesses raise money from a large number of investors using online platforms.
● Angel investors – An individual or small group seeks out high risk (and potentially high return) minority investments that align with their portfolio and values.

Exploring the benefits of minority investments

Minority investments can be an attractive option for small and medium-sized businesses seeking to raise additional capital, since they can help them grow and expand into new markets without giving up business control or adding new debt. In some cases, an openness to minority private equity investments provides access to valuable outside resources and guidance. Spreading ownership among multiple investors also limits the amount of financial risk incurred by any one owner or investor.

Innovation is all about trying new ideas to create value. In competitive markets, innovation is the key to continued growth and success for small and middle-market businesses fighting for market share. Minority investments can support innovation by funding talent acquisition and R&D projects, providing access to the connections and expertise of the investors, and offsetting the financial risks associated with new initiatives.

Case studies of successful minority investments

A successful minority investment is one that benefits the investors and the business itself in equal measure. Over the years, there have been quite a few examples that illustrate the power of a synergistic minority investments:

23andMe

Google invested $3.9 million in then-startup biotech firm 23andMe back in 2007. The company had developed a unique testing method that allowed consumers to perform genetic testing at home, and trace their ancestral lineage in the process. Although the technology was already proven, 23andMe had spent so much on R&D that not enough capital was available for an aggressive market launch. Google’s investment, expertise, and resources helped to support 23andMe’s launch while providing Google with insight into an emerging market space, along with a significant ROI.

Airbnb

Along with his reputation as a talented actor, Ashton Kutcher has also made a name for himself as a successful angel investor. In 2011, Kutcher and his partner Guy Oseary made a $2.5 million minority investment in Airbnb, while the company was still struggling to gain acceptance for the platform. Along with the much-needed funding, Kutcher also provided a respected name to lend credibility to the concept. Airbnb reached a market valuation of $100 billion by 2020, while Kutcher turned his $2.5 million investment into $90 million.

Lightsource

In 2017 BP, the oil and gas conglomerate, invested $200 million into Lightsource, resulting in a 43% ownership stake in Europe’s largest solar power project developer. BP had previously been in the solar power business but left the industry in 2011. The investment allowed BP to regain exposure to the growing solar industry, while Lightsource received the resources and backing of one of the worlds largest energy companies. After increasing their ownership to just under 50% in 2019, BP announced in late 2023 they would be acquiring the remaining 50.03% of Lightsource and continue targeting double digit equity returns from the profitable investment.

Strategies for attracting and securing minority investments

Securing a minority investment requires your business to be well-prepared and organized so that investors can easily see the value and potential of the business. One of the first important steps is obtaining an accurate valuation of the business to provide financial context for potential investors. A forward-looking business plan is another useful tool that gives prospective investors insight into the long-term vision. Strategies for attracting and securing minority investments might also include:

● Active networking with angel investors, private equity partners, and other potential investors.
● Maintaining readily available financial data and projections that demonstrate growth and ROI potential.
● A vision statement to help investors understand the culture and values of your organization.

Minority investment role in risk management and diversification

To a prospective investor, a minority investment in a small or middle-market business can be a good way to diversify their holdings and spread risk among more investments, rather than assuming majority positions in a smaller number of companies. Strategic investors must contend with:

● Systematic risk – Where the entire market usually suffers at the same time.
● Unsystematic risk – Where a given industry might experience an unexpected downturn.

Risk diversification strategies allow investors to create well-balanced portfolios that are better able to weather both types of risk over the long term, and well-chosen minority investments complement these strategies.

Legal and financial considerations

Before a small or mid-sized business seeks out or secures minority investments, they should carefully review the legal rights of minority shareholders. These considerations vary depending on the type of company (public vs. private), size of investment, and specific legal terms included in the contract. It is also important to review your own legal responsibilities as a business owner, which are likely to include:

● Keeping negotiations and conversations with investors confidential.
● Providing investors access to financial statements and records.
● Fiduciary duties to work in the best interest of the overall business.

Securing the advice of a legal professional is considered a best practice when terms like voting rights, residuals, management control, and exit strategies are drafted into the investment agreement.

Best practices for managing relationships with minority investors

Many of the legal considerations and best practices considered during minority investment deals also foster a more successful long-term relationship by defining roles and responsibilities clearly, establishing terms of governance, and ensuring exit strategies and motivations are aligned. Open communication is the underlying thread before, during, and after the minority investment that allows you to leverage the strengths of the investor while utilizing the funding in the most advantageous way.

Final thoughts   

Minority investments offer strategic advantages for small and middle-market businesses by providing access to capital without sacrificing control. Successful examples of minority investments over the years illustrate how a combination of financial support, expertise, and credibility can fuel sustainable business growth. By actively networking and keeping the company vision, financial performance, and copious record-keeping in focus, a small or middle-market business can successfully attract minority investments that take them to the next level.