Where Has All the Money Gone?

HOW TO FINANCE [almost] ANYTHING

You've built a profitable company on the cusp of expansion. All you need is some capital to fund your growth plans. But if your company isn't high-tech, getting it will take creativity

After a wild and crazy year in the capital universe, the first E-mail message that I got after New Year's Day seemed to be, well, just one more sign of the times: "We are in need of anywhere from $30 million to $100 million. ... Can you help me with some advice please. This project has been dropped in my lap. That's OK but I could use some good advice."

There's never been a time like this. Forget tulip-bulb mania; no matter how besotted Holland's investors of the 17th century might have been, there probably weren't too many burghers of the time who had the audacity to ask for help in finding -- and to expect to get -- their equivalent of my correspondent's megamultimillion-dollar goal. Just consider what happened in the financial world in 1999. Some 544 companies raised a record-breaking $65 billion from initial public offerings, thousands of other businesses merged-and-acquired their way through at least $1.4 trillion worth of deals, and the Nasdaq Composite Index rose by more than 85% -- the biggest annual gain of any major stock index in the history of the U.S. equity markets.

There has never been a time like this.

Thanks to a remarkable rise in the market trading value of public stocks (and an economy boosted by low inflation and technology-driven productivity gains), we have entered an era in which a huge amount of capital is wending its way through the equity and debt markets. It's not so surprising, then, that many people, like my correspondent, have concluded that it's now possible to raise money for just about any and every business venture.

But the sad reality is that they're wrong.

Despite all that available money, especially in the equity arenas, many entrepreneurs -- maybe even most entrepreneurs -- still face significant difficulties when it comes to finding outside funds to support their company's growth strategies.

It's heartbreaking but true. Investment banks may have raised a near-record $2.1 trillion for deals in 1999, but the vast majority of business owners (especially owners of small companies and low-tech start-ups) didn't stand a snowball's chance in hell of getting their hands on any of it. For plenty of good companies that had strong prospects (if they could only raise the capital!), financing options were -- as usual -- somewhere between limited and nearly nonexistent.

Here's the straight story behind all those jubilant headlines and dizzying statistics that tend to pervade the media these days. During the past year or so -- as tremendous new wealth was being created and entrepreneurship flourished across the nation -- two distinct tracks developed in the equity-financing market. And while it may seem simplistic to define them as "the dot-coms" and "everybody else," those descriptions are not far off. As Paul Schaye, a managing director at New York City­based Chestnut Hill Partners, an investment-banking firm specializing in mergers and acquisitions, puts it, "The markets have become bipolar."

The most favored child of today's capital markets is, predictably, a hypergrowth technology company: a kind of business that runs the gamut from online retailer to telecommunications service. So many companies in this category have successfully bucked all the age-old financing rules of thumb that it sometimes feels as if an entirely new world of capital has been created. During 1999 everyone from private-equity firms to day traders seemed to have money to burn when it came to investing in this endlessly proliferating, financially voracious sector. Meanwhile, low-tech companies, even those with well-established niches, healthy cash flow, and vibrant growth potential, were left to fight for the table scraps.

The photograph of iVillage cofounder Nancy Evans smoking a celebratory cigar after her red-ink-trailing company's $87-million initial public offering seems emblematic of one side of today's capital markets. The other side might be perfectly encapsulated by Schaye's description of one of his recent airplane flights. "I sat next to a guy who had built up a $200-million Main Street, America, type company. Profitable. Very successful. And he was complaining to me that he had absolutely nowhere to go unless he was willing to sell out to a larger company. He couldn't go public. He couldn't attract venture capital," Schaye says. "Those markets were completely closed off to him and to any other company that wasn't a dot-com, a real glamour business like Martha Stewart, or a massive leader like UPS."

"There's no question that a lot of sectors have simply been left out in the cold in these capital markets," agrees Howard B. Adler, a partner in the Washington, D.C., law office of Gibson, Dunn & Crutcher LLP. "There's so much money around, but most of it is chasing those tech deals. Last year I saw very established companies, venerable companies -- in areas like real estate, finance, manufacturing -- that just couldn't raise capital. Good advisers will tell business owners to go back to the office and wait for the market to change."

If that's the situation that large, well-established companies now face, it's not too surprising that conditions are bleaker still for small or fledgling businesses. "As a director, I've been working with a company, a medical-device manufacturer with about $12 million in sales, strong pretax profits, great product, specific niche," says Michael D. Madden, a former investment banker who is now a partner at the New York City office of Questor Partners Funds, a private-equity firm. "The owner came to me originally and said, 'Mike, we want to go public.' I told him, 'You can't go public. What you need is $5 million to $10 million in private-equity funds to help you bring the business to the next level. Then we'll see what your options are."

Unfortunately, as Madden learned, that kind of money just isn't available for companies like his medical manufacturer -- at least not these days. "This isn't exactly a low-tech company. It's got some sex appeal. But everyone I talked to had the same response. 'Great little company, Mike, but we don't think the market for what they do will ever allow it to grow to the point where we'll have appropriate exit liquidity.' " He concludes, "The reality is our own calculations suggest that if this company did manage to bring in the private-equity money, it could grow to about $50 million in sales. And that's just not big enough by current investor standards. All my guy can do is try to raise funds through the debt markets, or go into strategic-alliance mode if he can figure out a big company that his business could enhance."