Wind Point Partners, a private-equity firm founded in 1983 in Chicago, is a good example. "We're currently investing our fourth fund, which has $350 million from state pension funds, Fortune 500 pension funds, and funds from other institutions," says Jeffrey Gonyo, a managing director. He goes on to explain: "Historically speaking, we have a Midwest focus, and industry-wise we have been -- and continue to be -- generalists. We've invested in telecom deals but also in consumer products, institutional food companies, a bicycle importer, all kinds of deals."
Just like all the investors chasing after dot-coms, Gonyo and his colleagues are focused intently on their exit strategies, which might include an IPO (if they're lucky) but also might take the form of a leveraged buyout by management or a strategic sale to a larger corporation. What's different about Gonyo and company, though, is that they're not looking to run out the door on a deal almost as soon as they put their money on the table. In fact, their investment horizon hasn't changed much from what it was when the firm first opened its doors.
"We're patient investors. We don't have to earn our payout in a year or two, which is what many venture-capital and private-equity firms are now looking for," Gonyo says. "We're willing to make a commitment of three to seven years and to stay with a company for long enough to be sure that management has time to execute its growth strategy. We believe that over the long run our investors will be well rewarded for helping companies build that kind of value."
Entrepreneurs competing for funds from contrarian investors like Gonyo need to recognize, right from the get-go, that the standards they face are much tougher than anything a tech company now comes up against. "In this financing arena, cash is king. It's the world as we used to know it. Strong cash flow is absolutely essential to get investors interested," notes Robert Koenig, president of Woodbridge Group Inc., an investment-banking firm based in Woodbridge, Conn. "The reality is, people look at those kinds of deals not in terms of a company's revenues but in terms of its EBIT" -- earnings before interest and taxes.
For low-tech companies with strong financials, good growth potential, and a well-thought-out exit strategy, the right investor may well be out there somewhere. But as Gil Menna, a partner at the Boston-based law firm Goodwin, Procter & Hoar LLP, emphasizes, their owners will need to be creative, as well as relentless, to get deals to happen. "I'd pitch my company to private-equity funds as a great hedge to all those high-tech investments they've already made," he says. " 'After all,' I'd say, 'I've got a great story and I've already got revenues and profits. I'll give you the diversification you need.' "
It could happen. But for low-tech business owners with limited cash flow, a money-losing operation, or other unfavorable financial trends, the chances of successfully wooing a professional investor are nil. Unfortunately, that's also true for many otherwise strong contenders that are simply too small or too specialized to capture anyone's attention in these highly competitive times. "You have to be seen -- you must be visible on the landscape, and that ain't easy these days," emphasizes Madden. "Everyone is competing for a share of the mind of investors. For a lot of smaller companies, it's almost impossible to get them to notice you."
Sad to say, the difficulty of distinguishing your company from the competition for capital is just part of the problem. The other roadblock for small money-hungry businesses is that many just don't need enough funding to make it worthwhile for even contrarian investors to take a gamble on them. In a way, that's the most perverse side effect of the recent bull market. Private-equity firms, leveraged-buyout funds, and venture capitalists have made and raised so much money in recent years that the threshold keeps getting higher when it comes to deal dynamics.
As Michael Kane explains: "It used to be that a $300-million fund was a big fund. Now $500-million, $750-million, $1-billion funds are much more common. And with all that money to be deployed, investment firms want to put more money into a deal, because they figure their investment is going to take the same attention to watch whether they put in $1 million or $5 million or $25 million."
David Freschman, the president of Delaware Innovation Fund, an early-stage-venture-capital firm based in Wilmington, Del., agrees. "Now that many investment funds have gotten so large and are setting their deal sights so high, there's a real capital chasm that's occurred for businesses trying to raise up to $1 million or so in equity funds. The only options that most people have are seed-capital funds like ours or angel investors -- if they can manage to attract them."
Ah yes, angels. Is it any surprise that within a capital universe that has shifted -- and polarized -- as dramatically as this one has, the nation's angel community has undergone its own major transformation?
For one thing, it's gotten bigger, although its size is easier to estimate than to quantify. Thanks to the raging bull market, the M&A boom, and the growing ranks of stock-option-enriched executives, there are more would-be angel investors than there have ever been. Angels are better-heeled than ever, too. And that can be only good news for capital-starved entrepreneurs.
But there's another trend worth mentioning: today's angels are also more sophisticated than ever. Many of them made their fortune by working or investing in the technology sector. And that's where they intend to back new ventures.
Before he began funding other entrepreneurs, Bill Jensen was one of the cofounders of Rodel Inc., which manufactures systems for polishing silicon surfaces. He thinks of the old doctor/dentist/retiree model as "fools and angels," while describing the new, business-savvy breed he identifies with as "archangels." "We don't just provide money, but we're capable of bringing profound knowledge and experience to the companies that we invest in. And that's the kind of angel that dominates today's marketplace in terms of successful investments."
