How a company that consults with schools on real estate raised venture capital.
CEO: Greg Hinote Company: The School Co., in Nashville Business: Helps educational institutions unlock equity assets in existing buildings through sale/leaseback transactions or refinancing Founded: 1998 Number of employees: 7 1999 revenues: $0 Stage of financing: Seed Venture capital firm: Cahill-Warnock & Co. Amount: $2 million, broken into distributions of $500,000 every six months, contingent on the company's meeting predetermined milestones Equity taken by VC: Between 20% and 30% Ace in the hole: VC acted as cofounder
"Our funding has a different look from that of most VC transactions. For starters, it's real seed money as opposed to first-stage money. It was intended to finance a research-and-development period in which we'd look at sale/leaseback and other equity opportunities throughout the education industry. Second, we're a nontech company. And third, our VC, David Warnock of Cahill-Warnock, in Baltimore, is a cofounder of the business.
"I met David through a friend of mine who has a lot of institutional investment experience. David came to Nashville in the summer of 1998 to visit a company whose board he sits on, and the three of us had lunch. We were talking about the School Co.'s predecessor, a builder/developer of educational facilities, in which I was an investor, and what an impediment to growth real estate capital is for the education industry. As an institutional investor in a lot of education operators, David knows firsthand about how inefficient it is to tie up your capital in bricks and mortar. So we began brainstorming about how we could help educational institutions roll those real estate assets off their balance sheets. David called me the next day and said, 'Wow. I think this is a great idea. Do you think there's a viable business here? I could put up some seed capital, and you could put together three or four people and really look at this market.'
"Of course, before we actually pulled the trigger on the first half million, David and I completed a business plan together by phone, e-mail, and visits. That took about three months. I talked with operators to figure out pricing and to see if our concept would be marketable to equity investors on the real estate side. I agreed to run the company on a daily basis and also to put some of my own money into the effort -- not because we needed more cash but as a sign of management's commitment. David's role would be to serve on the board. By early November of 1998, we had our first $500,000 installment.
"Today we have a couple hundred million dollars' worth of real estate transactions in the pipeline, and we're in the capital markets raising money to fund at least $50 million of that. There's no question about it -- we're one of the lucky ones. We're especially lucky when you consider that as a general rule, it's tough to get operating company VC-type returns on a real estate transaction." --From an interview with Thea Singer