Equity: Lessons from a Lame Offering
It's a sad fact of entrepreneurial life: sometimes efforts to raise capital fail to pan out. When that happens, a company's future often depends on how successfully its chief executive can devise a strategy that raises capital from other sources and minimizes public-relations fallout among existing investors.
Doug Hayward, CEO of M.D. Enterprises of Connecticut, a health-maintenance organization based in North Haven, Conn., successfully met that challenge. Although his $1-million private-placement offering failed in the late 1980s, he managed to grow the company fast enough to get it onto the Inc. 500 list of fastest-growing private companies -- twice. He recalls the financing crisis: "When our company was founded, in 1987, we raised $4.5 million as an initial capitalization from about 1,500 investors who were physicians. But that proved insufficient to help us grow to profitability. So we launched a second private-placement offering the next year."
That was a mistake. "We were trying to raise $1 million to $1.5 million by selling shares at $1,000 apiece," says Hayward. Rashly, M.D. Enterprises felt so confident about its prospects that it didn't hire an investment-banking firm to handle the financing: "We just had our legal counsel create a prospectus, which we mailed to our existing shareholders as well as to other doctors throughout the state."
The results were disastrous. "We managed to sell only about $300,000 worth of our stock before we gave up and closed the offering," says Hayward. His assessment: "It was too soon after our initial offering to go back and try to raise capital. Plus, since we had yet to achieve profitability, our new financing bid raised serious questions in some people's minds about whether we were a viable business."
Hayward knew it was essential to squelch those doubts quickly. "The best way to do that was to very quickly come up with an alternative source of financing," he says. A public-stock offering seemed impossible under the circumstances. (Besides, the company was committed to having only physicians as investors.) So bank financing seemed to be the best alternative. "My chief financial officer and I spent about six months meeting with 15 to 20 bankers throughout the state," says Hayward. Meanwhile, he kept existing investors apprised of the move to obtain the bridge financing to "help us over the last hump."
"Ultimately," the CEO recalls, "we received only one bank bid. But all we needed was one." An $800,000 credit line, combined with the $300,000 raised from the second private placement, was enough to bring the company to profitability. "We managed to repay that loan within the terms of our agreement -- two years," Hayward boasts. Best of all, cash flow since then has been strong enough to keep the company growing at a 20% to 25% annual rate.* * *