.png){kind=small}
In a landscape where entrepreneurship has long been dominated by a select few, initiatives that champion diversity and inclusion are paramount. New Majority Capital, co-founded by Kris Schumacher, stands at the forefront of this movement, aiming to reshape the entrepreneurial ecosystem by empowering underrepresented individuals through entrepreneurship through acquisition (ETA).
In this exclusive interview, Kris Schumacher shares insights into the mission of New Majority Capital, its unique approach to supporting entrepreneurs, and the transformative impact it seeks to achieve.
Lauren Washington: What motivated you to start New Majority Capital?
Kris Schumacher: Each of the co-founders has their own different path to where we are, but I can speak to mine. I grew up in a small business family, working for my dad, who was a general contractor. I've always been close to small businesses and passionate about building things and helping people build things. After I graduated from Babson, I worked in the corporate world for 20 years. But my real passion has always been helping entrepreneurs and people who are building things for themselves. I was doing consulting for startups, particularly social impact startups, as a full-time side hustle.
When COVID came around, I saw an opportunity to take that and make something bigger out of it.
Over the course of my corporate career and working with startup entrepreneurs, I saw more and more disparities in who was getting financing, promotions, or even access to financiers compared to the people I knew in my extended family and neighborhood. I knew they should be getting funding and that they were capable of managing businesses, but they were hitting glass ceilings or not getting opportunities. So, to me, it was a no-brainer. We should be investing in underrepresented founders because it's the right thing to do, and we should also get a better return. Investing in people who don't always get the same opportunities generally yields better returns.
When Havell and I started looking at what we could do to make a difference, the first thing I tried was to raise a venture fund. However, there was a disconnect with venture LPs. They all wanted me to search for unicorns, but it didn't make sense for me to have a portfolio where only one out of ten is successful. So, I stepped away from venture, and Havell was just exiting his fintech company. We saw the opportunity in entrepreneurship through acquisition as a prime opportunity to leverage the largest transfer of wealth happening as baby boomers retire and sell their businesses. We saw the chance to create a more equitable distribution of small business ownership, which is currently dominated by white men.
What's missing is the support for entrepreneurs who don't have a safety net, who don't have capital to invest in a business, and even lack awareness. So, we wanted to tackle this by focusing on education, access to capital, and post-close support for entrepreneurs. We see small business acquisition as relatively low-risk because these are established, profitable businesses, not turnarounds. The challenge is providing support to entrepreneurs to make the acquisition and ensure their success post-close.
Lauren Washington: One of the reasons why I was drawn to your organization when we initially spoke was because of all of these various problems that you're solving in a unique way. Could you walk us through your model and how you're solving them?
Kris Schumacher: The first piece is really the education piece. We have our beta accelerator program, which is a ten-week hybrid in-person remote accelerator program where we teach entrepreneurs about entrepreneurship through acquisition. It covers a wide range of backgrounds, intentionally mixing people with MBAs, no college degrees, and those coming up through the trades. We give them all the tools to present themselves credibly, get funded, do due diligence, find the right business, and acquire it. The program is run out of our nonprofit and funded by JP Morgan and other foundations. We have a national expansion that's ongoing. We've run cohorts in Atlanta, DC and Providence, and there's a number more in the works already across the country.
The second piece is access to capital. We're also in the middle of raising our Fund One which will be making direct investments into these business acquisitions by graduates of our beta program, along with some additional entrepreneurs who come to us who might not have gone through the beta program, but we still are working with them closely. But these would be equity investments in those businesses ranging from $50,000 to a million dollars, roughly. We also provide post-close support to ensure the entrepreneur's success in running the business. We've helped to close 13 acquisitions so far in the past eight months, and we have another 25 right now that are live deals in the underwriting process that are moving towards a close. So we should be closing another 20 or 30 this year, even potentially before our fund one closes.
The third piece of our strategy is kind of the post-close support, and this is a bit of a longer-term goal as we get to scale, but we're already starting to implement some pieces of it now, which is really support for the entrepreneur in terms of strategy, in terms of additional financing support, in terms of back office support. So we can provide bookkeeping support, we can connect them with mentors as needed. We've already helped two of our entrepreneurs do follow-on acquisitions where they've acquired more than multiple companies.
Lauren Washington: It sounds like you're really solving all an entrepreneur's needs from the beginning to the end of their journey. Can you talk a little bit about why you think entrepreneurship through acquisition is a good path for underrepresented entrepreneurs and what type of people you think this would be a good fit for?
Kris Schumacher: Absolutely. Entrepreneurship through acquisition (ETA) is a good path for any entrepreneur. The reality is that many people are pushed toward the sexy startup idea, but startups are high-risk ventures, and not everyone can afford to live on a low salary while waiting for the business to take off. ETA offers the opportunity to have a salary from day one and acquire a business with existing cash flow. It's a lower-risk option compared to startups, with higher chances of success. We're talking about businesses where the current owner is making anywhere from $300,000 to $2 million a year. When we add investor and debt service to that acquisition, it still gives us a nice margin of error for the entrepreneur to be making a six-figure salary easily starting from day one.
ETA is suitable for people with grit, EQ, and intellectual curiosity. Specific backgrounds can lead to specific outcomes in ETA. For example, if you're a dentist, we can help you buy a dental practice. Having an MBA is not necessary; soft skills like adaptability and understanding are more important. ETA allows you to build upon existing businesses and use them as launchpads for new ideas.
Lauren Washington: This opens up exciting new avenues because the model of venture and startups does not work for everyone, particularly entrepreneurs who may not have that financial safety net. This offers the opportunity to be an entrepreneur with less risk.
Kris Schumacher: Exactly. I would add, if you look at the rates of default for SBA 7(a) acquisition loans, it's single digit, less than 5%. In some banks, it's lower than 2%. But say in general, 95% plus of these businesses make it at least ten years paying off their SBA 7(a) debt, If you pay down a $1.4M debt then you're $1.4 million richer in 10 years at the minimum, assuming no growth, assuming the business didn't even expand with inflation.
So it's a very low risk compared to the startup world, where nine out of ten fail.
You can also "buy then build." It's the idea that you can acquire a business and then use that business as a launch pad for another startup idea. Say you buy a business in the construction industry and you build a SaaS product that you can scale up to all of your construction customers. There's nothing that says you can only do what the previous owner has done. You can use your nice, stable cash flow as sort of a corporate entrepreneurship launchpad.
Lauren Washington: That's incredible. You mentioned a couple of times the failure rate of startups compared to the success rate of entrepreneurship through acquisition. What measures of success are important to New Majority Capital? How do you measure your impact in the space?
Kris Schumacher: We've engaged with a third party to track our impact measurement. Numerically, we track the growth in wealth for underrepresented entrepreneurs over a ten-year period. We also focus on employee retention and wealth generation for employees in the companies we invest in. Our goal is to create a holistic impact, not just financially, but also in terms of job retention, employee wealth, and legacy for the sellers.
Lauren Washington: So, we talked a little bit about the measures of success and metrics. Can you share a success story?
Kris Schumacher: Sure, one recent success story is David Oweyemi, a Nigerian immigrant whom we helped acquire a landscaping company in Darien, Connecticut. The company has been generating about $600,000 in profits annually for the last four years, with $2.1 million in sales. We helped David close the acquisition after almost two years of searching and navigating challenges due to his immigration status. He's now the CEO of the landscaping company and already thinking about his next acquisition.
Lauren Washington: Congratulations! So what can investors in your fund expect from deals like this vs a traditional VC fund?
Kris Schumacher: It is a ten-year fund with two one-year extensions and has the typical 2 and 20 structure, so it's structurally very similar to other funds. But the main difference is that these businesses are cash flow generating businesses and that the majority of them succeed. With a VC fund and even a private equity growth fund, you're going to expect a larger degree of failure and you're going to expect outliers to carry the fund. But in these businesses, because they're mostly main street businesses, the prices are low. For example, a typical company generating $600,000 a year in cash, will sell for between $1.2 and $2.4 million. That's a multiple that you won't be able to find on a much larger, on a much larger business.
The second piece is because they are cash flow generating businesses that are usually LLCs that are spitting out dividends to the owners, we're able to get the cash returned back to the fund fairly quickly. With each investment, we have a preferred equity stake that gives us our preferred distributions until we hit our multiple on invested capital (MOIC). And then once we hit our MOIC, we drop down to common equity Pari Passu distributions.
The big difference between this fund and others, either private equity or venture, is that we've gotten the majority of our exit with cash flow distributions that start to come in as early as quarter one. By the end of year five, we've pretty much got most of our exit on any particular deal. We're looking at a fairly typical return profile overall for the fund.
Lauren Washington: What's next for New Majority Capital?
Kris Schumacher: We're trying to get to a point where we have $150 million Assets Under Management. Whether that's in fund one or fund two almost doesn't matter. The idea is the sooner we can get there, the more impact we can have. We're in the middle of the national expansion for the beta program and have a number of exciting partnerships on the foundation side that I look forward to announcing soon. We're looking forward to making direct investments and helping more entrepreneurs succeed. What's next is just continuing the growth curve on the same hockey stick.
***
Interested in investing in New Majority Capital's hockey stick? Sign up for Fundr's platform to learn more.
Comments