Indeed, megagrowth has become the name of the game for all the equity-oriented investors and deal makers who inhabit the golden pole of our "bipolar" capital marketplace. "If you don't have the capability of becoming a company with $100 million in revenues within a three-year time frame and of dominating your market within 12 months, your company is probably not going to be able to attract professional investors," is the assessment of Stefania Aulicino, the founder and president of Capital Link Inc., based in Chicago, a financial consultancy that advises entrepreneurs.
That's a slight exaggeration, since Aulicino herself concedes that "there are always investors -- smaller angels -- who are fishing along the bottom." But it's undeniable that most of today's professional investors (especially venture-capital firms, leveraged-buyout firms, and other private-investment firms) are pursuing the most narrow target profile we've seen in years.
That may not seem fair to all those "noninvestment-worthy" entrepreneurs across the country who have already proved their business models and achieved growth and profitability, and who know darn well that their companies will likely outlive, let alone outperform, many of the dot-coms whose IPOs now turn them green with envy. But though it's unfair, the tech-investment frenzy has been driven by two very basic pieces of business logic: First, investment capital moves in the direction of what investors perceive as their greatest return at an accepted level of risk. Second, and perhaps even more important, savvy investors don't enter deals unless they can foresee an easy exit.
"The reason why tech deals are the ones being done right now is simple -- that's where most of the opportunity is," explains Susan E. Woodward, a former chief economist for the Securities and Exchange Commission, who now is vice-president of research and chief economist at OffRoad Capital Corp., an online private-equity firm based in San Francisco.
Woodward points out that inflation-adjusted returns on long-term treasury securities are at unparalleled highs. Regular old mutual funds are yielding mouthwatering returns. "So the required rates of return that companies need to be able to offer in order to raise new capital are astronomical," she says. "Technology companies typically are the only ones that can meet those hurdle rates." They've also become the only type of business venture that can reliably (at least for now) offer investors a profitable exit strategy. Thus, one profitable tech deal leads to another and another and another.
The more money that flows into the capital markets, the more unbalanced the situation seems to become. "Five or six years ago there was a real trend of investment funds starting up to invest in smaller deals, less-favored industries, real contrarian plays," notes Michael Madden. "But as the dot-com craze has taken over, what are the managing partners supposed to do? You might have a 30% track record, but that's not going to be good enough to attract new investors or keep your current investors happy. You've got to figure out how to put some octane in the tank. So you've got to move in the direction of technology."
The same irresistible forces have motivated investment bankers and other deal makers. "I've got one client, an investment bank in our region, whose technology bankers are working 24 hours a day. They can't handle all the business they've got," says lawyer Howard Adler. "On the other hand, the bankers who specialize in industries like real estate investment trusts can't do anything. They can't get a financing deal done. They're just sitting around. So what's happening is, a lot of those kinds of bankers are becoming tech bankers because that's where the action is."
Michael Kane, whose Los Angeles firm, M. Kane & Co., helps entrepreneurs assess their financing options and then raise funds from a variety of sources, puts it more bluntly: "I know that I'll have a better chance raising capital if I've got one of 1,500 dot-com pitches on a venture capitalist's desk than if I'm one of 200 or even fewer low-tech or nontech companies. So what are you going to do?"
As tremendous new wealth was being created and entrepreneurship flourished across the nation, two distinct tracks developed in the financing markets.
Fortunately, like every marketplace, this one has attracted contrarian investors, who can see lower risk, less competition, and appealing (if not astronomical) potential for reward where others see only an indistinguishable blur of non-dot-commers.
Welcome to the other, less glitzy pole of today's capital market. Money doesn't grow on trees here, and company founders don't become paper billionaires before they reach the age of 30. Still, the good news is, there are financing opportunities for entrepreneurs who are willing to live by an older, stricter set of business guidelines. For those of you who have been in business long enough to remember, it may remind you of how things were back in 1996 or 1997: there is money out there and investor confidence is high, but the markets are nothing if not disciplined, and competition for capital abounds.
It's not always simple to track down potential equity backers in this end of the market. They're usually not headquartered in New York or California, and they seldom get quoted in the national business press. But they do exist.
