A look at the best places to find financing, including private-equity investors, banks, venture capitalists, and non-banks. Also, some common pitfalls to avoid when seeking capital.
Money is easier to get than ever, and there are brand-new places to find it. Here's the smart way to land your share
Remember October 1997? All those Asian markets were taking hair-raising nosedives. Once-invincible Hong Kong looked weak. Closer to home, when the Dow Jones Industrial Average collapsed by a record-breaking 554.26 points, the whole global economy seemed poised on a precipice. The only question was, how bad could things get?
Oddly enough, prospects never looked brighter for Cornelius Geer, "Cam" to his business associates and friends in Middletown, Conn. Geer, the founder and president of Connecticut River Interactive LLC, a two-year-old Internet-development company, completed a deal for a $100,000 financing package from the Small Business Administration during the final days of October, "right in the middle of all that chaos," he recalls.
"The amazing thing," he says, "is that not once during the whole process of finalizing that loan, not once--with all the people we had to deal with to close it--did anyone ever express anxiety about getting involved with us when all those other markets looked so shaky."
He's not alone. Stephen King's entrepreneurial accounting firm, Virtual Growth Inc., based in New York City, raised $250,000 from outside investors during those same tumultuous autumn weeks. "What was going on in those markets was totally irrelevant to us," King says.
Clearly, the financial realities affecting small and fast-growing companies like Virtual Growth and Connecticut River Interactive are just not reflected in the headlines. There's no end to the erroneous conclusions one might draw from media coverage and statistics that focus only on Wall Street, on the megamergers and acquisitions, the biggest company deals, the glitziest initial public offerings, and the most public investments in American business.
The bottom line is this: The capital markets--that vast universe encompassing private and public investment arenas as well as the U.S. and international banking communities--have changed in many far-reaching and deep-rooted ways. But the most significant impact of the changes may well be their effect on the world of entrepreneurial businesses. During the past decade so much wealth has been created, in so many ways, in the United States and abroad that the capital markets have been flooded with money in search of new, profitable investments.
The private-placement market is just one example. During the first three quarters of 1997, just over $250 billion was invested in these deals alone, according to Securities Data, which tracks the financial markets. That amount was nearly twice the $128-billion private-placement level of 1993.
"Too much money chasing after too few good deals" is a refrain repeated up and down Wall Street and elsewhere. Investors and financiers have come to recognize that they can't keep pursuing the same very short list of desirable growth companies and growth industries with take-it-or-leave-it, one-size-fits-all deals. The resulting competition and cooperation among all the cash-rich players have created myriad financing choices for business owners.
Granted, not even the best of times will last forever, which means we'll undoubtedly experience slowdowns, probably even big ones, within the more cyclically driven sectors of the financial markets. But thanks to other strong forces, including demographic trends (all those baby boomers should continue to boost investments and savings, at least for the next decade or so) and the sheer momentum fueled by all that money that has been made during the past decade, America's entrepreneurial community can expect a wide range of financing options to remain vibrant, even if the global stock markets continue their roller-coaster ride. How's that for a new world order?
PRIVATE-EQUITY INVESTORS
"Let me tell you a story about a breakfast meeting I had recently," begins Gill Cogan, a managing general partner at Weiss, Peck & Greer Venture Partners. The venture-capital firm, with offices in San Francisco and Menlo Park, Calif., has invested in more than 200 growth companies over the years, which gives Cogan some degree of authority. "I was meeting with a group of people who manage tens of billions of dollars in institutional money," he says. "They told me, very simply, that they were still underallocated in venture capital and alternative assets," meaning growth-company investments. "That's what they're telling me after all the turmoil in the global markets," he says.
"The reality is," Cogan continues, "there just aren't that many places to invest all this capital. And people are beginning to realize that there's no point in trying to time your growth-company investments to what's happening in the stock markets. You can't tell when it's exactly right to get in or get out. But given how profitable this sector has proven to be, investors are figuring out that you just have to get involved."
These days, getting involved can mean a lot of things. Take the private-equity marketplace, a broadly defined investment sector that includes venture capitalists, large and small angel investors, hedge funds, private investment pools, and even insurance companies and other institutional players that either participate through money-management funds or make direct capital investments in growth companies. The one element binding this diverse group of investors together is that they receive some type of equity or stock vehicle when they put money into a growth company; each group then has its own set of goals in regard to how much of an investment return its members hope to earn on that stock and how quickly they hope to earn it (usually when they cash out during an initial public offering or in a merger or acquisition deal).
In the assessment of Mendy Kwestel, a partner and director of entrepreneurial service at accounting and management- consulting firm Grant Thornton LLP, in New York City, "there is a ton of money--so much liquidity throughout the marketplace--that there is now private-equity money available for companies at every stage of development." What a difference from the traditional state of affairs that most growing businesses have been forced to deal with: no money at all for start-ups or companies that were too small or too old or too dependent on their founders or even too needy for cash (that is, unless they happened to fit onto the investment community's shortlist of sexy companies du jour).
And that is a trend that keeps snowballing, thanks primarily to the activities of two groups: first, the pension funds, insurers, and other large investors that continue to accelerate their investments in growth companies; and second, the investment-world professionals, who are responding to the deluge of money by continually setting up new funds. Most of those activities occur without anyone outside the financial community even noticing, except--once again--in cases of the very largest deals. But both developments show signs of longevity, which means the changes in the entrepreneurial-financing marketplace may well turn out to be both structural and permanent.
