Then Russell had a chance reunion with a former camper. Paul Garofolo had made it big as a sports agent, and he had big ideas. He said that with all the capital available to entrepreneurs in the mid 1990s, NASC should have no problem raising enough to break into other sports and become a national player. With Garofolo's offer to help direct Russell to ready capital, and with visions of becoming a "bazillionaire," Russell charged ahead.
To attract investors, NASC needed some big-name credibility. Russell formed alliances with the NFL, golfer Jack Nicklaus, and Major League Soccer. That did the trick. NASC raised $2 million in two private placements. (See " The Deal," October 1996.) Russell used the funds to roll out football, golf, and more soccer camps in 1996. "'If you build it, they will come' became our motto," Russell says. "I thought I'd just open camps with the NFL and Jack Nicklaus, and kids would knock the door down."
He was wrong. Russell had no contacts in the youth-football and -golf worlds. NASC planned to open 80 football and 75 golf camps in 1996, but the demand was so slack that Russell could run only 12 and 25, respectively. NASC registered a $1-million loss, its biggest ever.
NASC has since rebounded. The company posted a $250,000 profit on revenues of $5.7 million in 1998. Good numbers, but Russell is still making annual interest payments of $240,000 on his $2-million debt and has yet to make a single payment on the principal. "If I had it to do all over again," he says, "I would have never taken that money. I would have kept our nose on what we do best, soccer. We'd be a lot farther along if we had." --M.B.
Raising capital is job one
THE CEO: Scott Budoff
THE COMPANY: Catalog retailer Fulcrum Direct, in Rio Rancho, N. Mex.
THE BUY-IN: "Going public was just another way to raise money."
When Scott Budoff hooked up with a partner to build a children's clothing company, the duo's timing couldn't have been better--at least as far as the financial markets were concerned. From 1994 to 1996, as Fulcrum Direct grew from a start-up to a $38-million business, so did investors' appetite for small companies. "The market was much more willing to take small-cap risks," says Budoff. "As we grew we expected to go public. It was just another way to raise money."
In fact, he'd banked his business plan on being able to raise megamillions from both the private and public markets. Budoff and his managers became experts at unearthing money from every financing source imaginable, starting with friends and family and moving on to angels, institutional investors, banks, factors, corporations, and strategic partners.
What he and no one else expected was how much all this fund-raising would distract attention from Fulcrum's core business. Barely three years old, the company had yet to solve some basic operational problems when its management began preparing for an IPO in earnest.
The pending offering was like an insatiable monster, eating an "exorbitant amount of the management team's time and resources. As hard as it is to raise money in private markets, it's even harder in public markets," says Budoff.
Once a company heads down the IPO path, he adds, "you can't stop. The business was geared up for a certain level of volume, and we needed the capital." Besides, at the time, capital was there for the taking--wasn't it? Budoff was buoyed in that belief by other small-cap deals in the catalog industry and so, he says, were his investment bankers. Fulcrum was poised to complete a $35-million offering in October 1997. Sales that year were on their way to $62 million.
Then a funny thing happened on the way to the market. "We were advised the market no longer had any interest in small-cap deals at that time," Budoff says. In so many words, Fulcrum was told it could have a road show, but no one would show up. The company went back to private sources looking for more help. It considered scaling back operations. Nine months after the IPO that wasn't, Fulcrum's board, out of cash and out of possibilities for raising cash, filed for Chapter 11 on July 29, 1998.
Budoff says he's taken away several lessons. Lesson one: "There's no such thing as easy capital in any market." Even money from friends and family "is very expensive because of the relationships and the expectations."
Lesson two: "Being successful in private markets doesn't mean you're going to be successful in the public market."
Lesson three: When you're focused so much on raising capital, he warns, "you're spending a lot of time on something very important to your business but which has nothing to do with your business." --S.G.
MYTH NUMBER 5: 'EVERYBODY IS AN ENTREPRENEUR'
Too hot to handle
THE CEO: Andrew Sather
THE COMPANY: San Francisco strategic Internet consultancy Adjacency Inc.
THE BUY-IN: "We assumed employees would want to know all the nitty-gritty financial details."
Adjacency CEO Andrew Sather and his partner, Chris DeVore, figured that for their four-year-old company to become a powerhouse, they would have to tap into the entrepreneurial instincts of every staffer. That meant treating all employees as if they were partners. All were given equity stakes. "I tried to set up the kind of company where I'd like to work," Sather says.
Last year, Sather and DeVore gathered their 25 workers together every week to discuss the most intimate details of their company, including cash flow and potential customers. The partners could tell that workers appreciated the honest communication. At meetings, employees would pepper the partners with loads of questions. But it quickly became apparent that there were some things employees would rather not know. For instance, they didn't want to hear about Adjacency's close calls with missing payroll--not an uncommon syndrome in the entrepreneurial world, but one that employees find quite unnerving. "We overestimated our employees' desire to be entrepreneurs, and sometimes we scared them," Sather says.
