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In a private target market that seems to have been picked clean by VCs and PE firms, this a recent white paper by Lateral Investment Management says that founder-led “bootstrap” companies represent the “last untapped opportunity” for PE funds   Here’s an excerpt from the intro:

Founder-led companies have been the foundation of the U.S. economy since the Industrial Revolution. Founders have built and led enduring businesses through profitable growth and, often, decades of evolution and development.

Before there was an institutional private equity market, founder-led bootstrapped businesses funded by personal savings were the norm in the U.S. From Andrew Carnegie (U.S. Steel) and Henry Ford (Ford Motor) to Larry Ellison (Oracle), founder-led businesses have a rich tradition of success in the U.S.–and for good reasons. More recently, software behemoths Atlassian and SAP never took outside investors and strong-willed founders Elon Musk (Tesla, SpaceX) and Mark Zuckerberg (Meta) have built distinctively founder-led companies despite taking institutional money.

Successful founder-led businesses are hardy organizations that have developed robust corporate cultures and loyal customers. They have a sense of mission and corporate identity. They are innovative and scrappy. They have survived through growing pains, business cycles, shared challenges, and setbacks. They are built on the sweat of their founders who have reinvested profits in growth from hard-won customers rather than going through rounds of VC funding.

The white paper says that founder-led companies represent a huge untapped market for PE, and that most can be found in the $9 trillion U.S. middle market sector. According to the white paper, there are 95K lower middle market bootstrapped companies, including 34K in the technology or technology-enabled service sub-sectors, and represent a high-value opportunity “hidden in plain site.”  The white paper says that middle market founder-led companies have historically realized higher returns and lower loss rates than other entities and points out that lower middle market targets have entry valuation multiples that are 40-70% less than other targets.

– John Jenkins