Financial experts discuss LouVan Products' attempt to sell $2.5 million in common stock for working capital and the development of new products.
The Money Hunt
LouVan Products Inc., based in Broken Arrow, Okla.; founded in 1994
Manufacturing toys for preschoolers, based on a proprietary "Color-N-Wash" technology
$200,000 in revenues in 2000; not yet profitable
The owner, who has a majority share, and her husband tapped their personal savings and credit for $225,000 to support five years of research and development. In 1999 they raised $150,000 by selling a 14% stake in the company to 16 angel investors. They also have a $70,000 bank line of credit
To sell $2.5 million in common stock, priced at $5 a share, for working capital and the development of new products
There's no doubt about it: Louvan's president, Vanessa Faller, is a creative talent, with a dozen inventions under her belt and patents pending on several of them. But when it comes to raising capital for her company, she and her husband, Louis, have been far less successful. "I don't understand it," she says. "You would think that given the response that we've had in such a short time to our product, and given the fact that this is a minority-owned, woman-owned company, someone would look at our business and say, 'This could be a home run for us.' Instead, people tell us, 'You've got to get out there and sell the product.' But that's hard to do without enough money for production and marketing."
After some banks and private-equity investors turned the Fallers down, the couple hit on a strategy they believed would give them the cushion they needed. They planned to sell 33% of the company in a direct stock offering, which they calculated would raise $2.5 million for working capital and the development of new products. So far, the offering, registered in October, has yet to raise significant funds.
Yet, despite its financial constraints, LouVan has continued to achieve important marketing milestones. After starting small in a handful of local Wal-Marts, the company had lined up orders from 33 of the megachain's outlets in Oklahoma and Arkansas by the end of last year. "We're also going to be in 25 million Christian and educational mail-order catalogs in 2001," Vanessa Faller reports. So how should LouVan capitalize on that growth potential?
Copresident of Women's Business Development Center, a Chicago-based nonprofit group that provides early-stage management and financing advice to companies owned by women
"This company faces some real hurdles when it comes to attracting investors. Sophisticated backers won't want to be involved, because they're looking for a 30% rate of return and an exit in three to five years, which is unlikely for a company in this industry. Being in the toy business is a real drawback: people know that toys can be fads. Also, the 'investment space' has recently been plagued by some bad stories, like eToys. That will scare people off.
"If she licensed her proprietary technology, she wouldn't need all that capital to pay for manufacturing and marketing."
"The company's chances of attracting significant capital from a banker may also be limited unless LouVan develops in such a way as to become asset heavy. There are microloan programs that support women- and minority-owned companies, but LouVan needs much more capital than a microloan could provide.
"So I think that that brings this owner to two choices. She could simply concentrate on research and development, which sounds as though it's her love and area of natural expertise. If she licensed her proprietary technology, she wouldn't need all that capital to pay for manufacturing and marketing. But if she wants to stay in the business she's in, I think she's going to have to network her way into finding a large angel investor who likes her and likes the product and can also bring added value to the company because of expertise in the retailing or toy industries."
Vice-president of operations of McNeil Management Inc., a Miami-based investment and business-advisory firm that has a strategic alliance with the Access to Capital Group, which links minority entrepreneurs with investors
"This is definitely a company that would get looked at if it crossed my desk. It's got revenues on the books. It's demonstrated some type of market. Having the support of Wal-Mart, even in a small number of stores, is very good.
"Here's what's difficult. You've got a lot of people who are already in the equation. It's not a showstopper, but it's definitely a potential negative with the possibility of diluting ownership with the increased number of investors. You're also looking at a company that's trying to make a very big fund-raising leap. Can they really justify going from a valuation where 14% of the company was worth $150,000 in 1999 to one in which 33% is worth $2.5 million today?
"I'd like to see a more reasonable set of financing expectations and a very, very focused approach. It's nice that the owner has all those inventions and long-term prospects. But all I care about is, What are the one or 2 things that this business is going to be an expert in? I know you can do 15, but I want you to focus on one or 2. So if you can attract my attention for 10 minutes, be prepared to tell me precisely what your focus will be and exactly how you'll use the money you're going to raise to produce clearly targeted results."
Donald J. Franceschini
Chairman of Delaware Innovation Fund, based in Wilmington, Del., a firm that provides management support and capital for early-stage companies in the region
"Let's be realistic. A better approach for the company prior to serious consideration of a public offering would be to first concentrate on proving its business model, achieving more of a customer base, and, if necessary, raising debt capital, maybe through a Small Business Administration program.
"This company's real long-term potential comes from expanding its current distribution with Wal-Mart, which is the nation's largest toy retailer, or by pursuing alternative distribution through other well-established toy retailers that have a large consumer base. If its toys are providing sufficient turns and profitability in the existing 33 Wal-Mart stores, and if they can get support from store managers, they should be in a very good position to keep broadening their sales base within the Wal-Mart chain. In a sense this small base of existing stores serves as a test market, which can then lead to a greater probability of expanding sales and attracting private investment.
"There are a lot of retired Wal-Mart executives out there available for hire as consultants. LouVan could really benefit from a relationship with someone like that, someone who would have proven credibility within the chain, as well as an expertise in selling and an understanding of the retailing sector. In fact, someone like that might even get so interested in the company that he or she would be willing to invest some capital in return for an equity stake and management role. That would free the owner up to concentrate on what she's clearly well-suited for, the development of new products and proprietary technologies."
Jill Andresky Fraser is Inc. 's finance editor.
Click here for more cash-seeking companies in " The Money Hunt."
Please e-mail your comments to email@example.com.