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Capacity Capital invests in revenues instead of valuations or collateral

By Tom Ballard, Chief Alliance Officer, PYA

“We invest in revenues instead of valuations or collateral,” says Jonathan Bragdon, Managing Partner at Capacity Capital and Founding Partner and Chief Executive Officer of closely aligned Capacity. The former invests in overlooked and underestimated founders, while the latter is a strategic advisory firm that supports small, growing business to help them get equipped to scale, connected to growth partners, and matched with aligned funding.

As a Chattanooga native who moved away when he was seven years old and returned to attend Covenant College before attending Georgia Tech and Vanderbilt University, it’s all about helping businesses in the Southeast. Bragdon draws on his experience in a number of venture-backed and bootstrapped companies over two decades (see the extensive list on his LinkedIn page) as well as his involvement with the local entrepreneurial scene through initiatives like CreateHere, CO.LAB, Will this Float, GigTank, LaunchTN, and CO.STARTERS.

“My heart is with the tech-enabled high-growth bootstrappers and misfits,” he told us during a recent interview. “I’ve seen the ins and outs of different types of capital.” That perspective includes raising capital himself as well as helping others do so.

Bragdon launched Capacity Capital as a revenue-based alt-fund, investing $50,000 to $250,000 of founder-aligned capital into the “overlooked and underestimated.” At one time, he even thought he would launch a typical venture fund, but decided against it, saying, “For me, it would be like gambling with other people’s money. We are looking to create market-rate returns by using a different portfolio model, one that doesn’t need to find the huge win that covers a bunch of bad bets.”

Instead, Bragdon started to build the kind of resource he had wanted but couldn’t find and ended-up building a “strategic advisory firm and fund that fits bootstrappers better” by, in part, drawing on the lessons he learned over the years.

“Building a business is completely different from building a product,” he explains. “I see a lot of post-start-up companies wandering in the desert. They may not be sexy tech, venture capital-backed, or highly disruptive companies. They may not get the headlines. But they may have a great team and a solid growth model to generate revenue and profit. All they need is the optimum capital, the right growth tools, and a network of ecosystem partners to scale. Those really excite me.”

Noting that pursuing equity investment is the right strategy for no more than three percent of companies, Bragdon asks, “What about the balance? What type of capital do they need?” His answer is funding that sits between debt and equity and is compatible with both. Companies that fit venture capital are rare but bootstrapping a company doesn’t necessarily mean “slow growth.” Only 5 percent of the Inc. 5000 used venture capital to grow that fast.

“It’s a different asset class,” Bragdon explains. “Our funding acts a lot like equity, but for the founder we are less expensive than equity if the venture is successful and less expensive than debt if unsuccessful.” He says their overall focus is on helping increase revenue and margins. “In many cases, it might be the last investment the company needs. Sometimes valuation is just a vanity metric.”

As noted above, Capacity Capital invests $50,000 to $250,000 in overlooked and underestimated founders. That includes minority and women-led businesses. “The majority of our portfolio companies are women-led,” he notes. Some of their deal flow comes from other investment funds and traditional debt sources where the companies didn’t fit the funding criteria. Other sources include ecosystem partners, like LaunchTN, and professional service firms.

Funding typically requires a number of different tools over time, but if one doesn’t fit, Bragdon says it can be disastrous to both the founder and the investor. It’s better for both investors and founders to hedge their bets a little bit.

Bragdon says one of the firm’s workshops walks founders through the development of a capital strategy that helps optimize the blend of equity, debt, and alternative funding. “Our advice is to approach it as if you’re hiring a core team member,” he says. “If you’re not doing it that way, you’re going to get hammered. I know from personal experience and from helping a lot of other companies along the way: The right capital can be your best partner, but the wrong mix of capital can be catastrophic.”

From his perspective, venture capital isn’t the right choice for most businesses, but when used well, it can be very powerful. Unfortunately, Bragdon says that “many VC-backed founders are using it incorrectly. Founders should focus on smart growth and use VC to support that — instead of treating it like a super drug.”

He adds that one of the key drivers in making decisions about the proper capital strategy is understanding the founder’s long-term objectives. Is it a high-growth business with clear acquisition potential? Is it ready to sustainably scale at a rate investors expect? Is it more of a stable, long-term play with the owner planning to hold onto the business for years? Is the founder ready to trade control for capital?

“We focus on helping SaaS (software-as-a-Service), service, and even light manufacturing companies that have between $250,000 and $2 to $3 million in revenues,” explains Bragdon. He expands on the ideal client by saying the founder needs to have what he calls a “line of sight to doubling revenues in 12 to 24 months, enough incremental margin to make it (the capital strategy) work, and a business intent to grow and also be involved in their community.”

Both Capacity and Capacity Capital were launched last year as the COVID-19 pandemic gripped the country. Even though Capacity Capital has secured some funding from both the Kauffman and Rockefeller foundations, “What we are doing is a different kind of impact investing… investments with a real return,” Bragdon emphasizes.

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