President: Brian Brittsan
Company: Water Management Services Inc., in San Diego
Business: Designs and installs water-conserving upgrades in buildings
Founded: 1996
Number of employees: 20
1999 revenues: $2 million
Stage of financing: First
Venture capital firms: Nth Power Technologies, Early Stage Enterprises, the Calvert Group (a mutual fund firm)
Amount: $2.6 million
Equity taken by VCs: 30.76% total
Ace in the hole: Structured company with an eye toward attracting VC money; had revenues before seeking financing

"From the beginning, my founding partner, Wade Smith, and I had a strategy for the company that called for establishing the 'right' profile of our management team and board and making sure that our image and business model were appropriate for both VC funding and a future initial public offering.

"Less than three weeks after incorporating, we pulled together a trio of high-net-worth individuals who gave us investment advice and legal counsel in exchange for equity. Not only did those advisers help us put together a business plan, navigate the capital markets, and attract to our board Wall Street­ savvy folks like the senior financial analyst for General Motors, they also allowed us to delay payment of our early legal expenses -- close to $100,000.

"Next we rounded out our management team. At the same time, we enlisted a broker to put together a private placement for us. We decided not to pursue venture capital at that point, because we wanted a very small placement in order to limit the dilution of the company. The broker raised some $700,000 from seven accredited investors and in return took a commission of about 8%. As I see it, an Achilles' heel in the financing process is that owners whose core skills are not in financing pull themselves out of the operations of the business to do something that they're not very good at, and everything unravels. We chose instead to put our financing in the hands of others so that we could continue to add value to the business.

"We did that, in part, by forming a strategic partnership with a plumbing subcontractor, who invested $250,000 in us. And we brought in sales: some $84,000 in our first year and about $1.9 million in our second. Having revenues was a critical component to our financing; investors like to see their money going for business development initiatives rather than to crack your monthly nut. Because it's very difficult for VCs to get their arms around the upside of a service-only company, we were also very conscious about developing a technology to act as an enabler for our service business: an Internet-based water meter reading system for tenants of apartment buildings.

"Finally, in late 1997, we felt ready to plunge into the capital markets. We hired an investment banker with a focus on the energy industry -- Boston-based EnCapital -- for a monthly retainer plus commission. All told, we must have talked to 50 VCs -- it was like a dog-and-pony show. Yet even with EnCapital advocating for us, it took nearly two years to close a deal. Why? Partly because most VCs have a minimum amount they want to invest and we were looking for only $2 million, again to limit dilution of our holdings while we went about building value.

"Ironically, at the end of the day, the VCs that invested in us were all brought to the table by in-house management. Still, I'm not sorry that we hired EnCapital, because of its contribution in recasting our business plan, determining our valuation, and advising us in how to negotiate." --From an interview with Thea Singer