Case in point: today's institutional investors are flush with cash not only because their previous investments have paid off so beautifully during the recent bull market but also because Americans keep pumping funds into 401(k) and other retirement-savings vehicles. (Granted, cash-ins of some of those investments will start mounting in about 10 years, when the oldest boomers can start drawing on their retirement accounts, but the youngest of this group are still in their thirties.) So long as demographic trends are on the buy side, new investment pools will keep getting launched. What that means to owners of small entrepreneurial businesses is plenty of new opportunities. Private-equity investors and others have been forced to broaden their notions of what constitutes a desirable growth company. And, increasingly, investment groups are specializing in niches where they perceive the competition from other investors to be less fierce.
The Sprout Group is one example of the niche players. "We've responded to the competitive environment by focusing on industries that are currently out of favor with the public-equity market, like biotech, medical devices, and early-stage information-technology companies," says Patrick Boroian, a general partner at Sprout, which is the New York City-based venture-capital affiliate of financial-services giant Donaldson, Lufkin & Jenrette. By scouting off the beaten path, Sprout has significantly increased its financing opportunities: through the third quarter of 1997, the firm managed to invest $130 million in growth companies, up from $129 million during all of 1996.
Ted Stolberg and his partners at Stolberg, Meehan & Scano, in Denver and New York City, are another good example of niche players. They set up their first private-equity fund several years ago with $70 million in investment capital; they just raised another $100 million, to support a second pool aimed at their particular investment niche.
"We like to call it M&Ms, meaning misfits and mavericks," Stolberg says, laughing, "the kind of companies and executives that might otherwise fall through the cracks." While some of the deals he and his partners have gotten involved with have been much larger, one of the group's investments was a $300,000 infusion of capital into a "re-start-up" of a sidewalk-chalk manufacturer aimed at the children's toy market. "We like the M&M niche because there's dramatically less competition here, and we believe that the potential returns are fantastic," Stolberg says.
Broader investment parameters, specialty niches, and other new developments have opened the private-equity door to many companies whose owners, up to now, have felt like wallflowers at the money-market ball. In the past they were overlooked by investors despite whatever strong fundamentals and market potential they had going for them.
Listen to Bill Vogelgesang, a senior vice-president at the Cleveland investment- and merchant-banking firm Brown, Gibbons, Lang & Co. "We see deals--and are doing deals--now that could never have gotten done five or six years ago. Companies that never looked attractive before--maybe because they were service companies without any collateral, or they were operating in industries that weren't glamorous--suddenly have all kinds of financing opportunities before them. We just completed a deal involving a foundry that wound up earning a much higher valuation for its equity than we might ever have imagined possible. It's a whole new environment."
Still another sign of the many different sources of financing capital now available shows up in the behavior of investors who are looking for companies to buy. "One thing that we see is the involvement of 5 or 10 potential buyers for every one business seller who's out there. That trend has many side effects," explains Gayle L. Veber, the managing partner of Veber Partners LLC, an investment-banking firm based in Portland, Oreg. "One is that investors who might otherwise be interested only in outright purchases of a company or in buying only majority equity stakes are now willing to consider deals where they invest in significant minority stakes instead. That broadens the capital-raising opportunities for all kinds of growth-oriented companies."
In a quicksilver marketplace like this one, entrepreneurs more often than not need the assistance of a well-plugged-in investment banker, a corporate finance lawyer, or an accounting firm to help them track down one of the new breed of specialty investors who are definitely not listed in the yellow pages. Still, a word of caution: given the frenzy within all the capital markets, scam artists and incompetents abound who are more than willing to proffer advice and provide connections--for a fee.
Consider the unhappy experience of one East Coast software manufacturer whose chief executive retained a small and less-than-prominent investment-banking firm in his efforts to woo private-equity investors. "My investment banker and I flew down to meet with one group during the summer," he recalls. "I began the meeting by giving my presentation, which I thought went well. But just before my banker was supposed to come in with his clincher, he received a telephone call, left the meeting, and never came back." Since then, one potential lead after another has faltered. He notes ruefully, "I had planned to upgrade my team of advisers, especially my accountant, after I raised the private-equity money. Maybe I should have done it the other way around."
Thanks to a team of top-quality advisers, including an accounting firm and an investment-banking boutique with strong ties to new-media-oriented investors, Garnet Heraman managed to avoid the difficulties that can surround the search for capital. Heraman, the chief executive of StockObjects, a New York City-based new-media stock library, and his partner managed to raise $700,000 from private-equity investors within a year of their company's launch, all the while managing to retain close to 90% of its stock.
"This financing marketplace is so full of opportunities for good growing companies that one of the main challenges is not to raise more than you really need," Heraman says. The other challenge? "Since we were able to choose between all this money that was available to us, we needed to enforce one shibboleth: investors had to bring more to the table than just money alone if we were going to let them get involved in our company." Company owners like Heraman expect their investors, lenders, and financial advisers to leverage their funds with high-quality contacts and industry expertise.
