One company's odyssey inside the most secretive capital market there is

This is the story of CEO Gary Russell's arduous search for capital in the hidden realm of private-placement financing. It is also the story of the investors, bankers, and other players--normally so secretive--who for this article agreed to reveal their roles in getting Russell his deal. Most of all, perhaps, it's the story of a teacher-turned-entrepreneur who was forced to learn about a whole new world--complete with its own vocabulary, instructors, and complex set of rules--in order to raise the money he needed to help his company grow.

Some entrepreneurs spend their entire careers scheming for ways to raise enough growth capital to keep their companies on the fast track. Not Gary Russell, the 52-year-old founder and chief executive of North American Sports Camps (NASC). A teacher by training, Russell became an entrepreneur almost by accident when a tiny soccer camp he had started during his summer vacation in Pittsburgh, back in 1969, became increasingly popular with parents who liked his approach to motivating youngsters. Over a period of more than two decades, the business grew into a national company based in Norwich, Conn. Last year NASC earned revenues of nearly $3.5 million, from about 600 camps and 40,000 campers in 34 states. During all those years, Russell remained totally committed to his company's mission statement--"lifting people beyond their vision of capability"--and believed that he had achieved more as a businessperson than he had ever expected.

But two years ago an accidental reunion with a former camper gave Russell a new vision and galvanized him into launching a high-speed growth campaign, the kind that requires large infusions of capital to turn that vision into reality.

The Wide World of Private Placements

Many entrepreneurs focus their capital-raising efforts (and fantasies) on the prospect of either going public or attracting venture capitalists. But for the majority of companies, those aren't realistic options. The companies aren't in sexy-enough industries, or they're too new or too small. And the initial-public-offering and venture-capital markets are volatile at best, which is bad news for all but the strongest entrepreneurial ventures. The good news is found in the universe of private-placement financings. It is vast, well-heeled, and much more accessible to small growth companies than most other financing options.

Last year alone, more than $134 billion worth of private placements were completed, according to Securities Data Co., a research company in Newark, N.J. It's a massive market that many entrepreneurs either don't know about or don't know how to tap into effectively. And investors find only out about companies that manage to surmount both those hurdles.

Despite whatever market inefficiencies may exist, private placements can offer tremendous advantages to companies like North American Sports Camps. For one thing, their base of potential investors is huge, encompassing everything from large insurance companies to banks, pension funds, private investment pools, and even angel investors. That makes private placements a more consistent financing option than those that depend on the strength of a bull market. They are also typically much more flexible in their deal design and requirements than other types of investor or bank financing. That paves the way for riskier deals--or smaller ones, like NASC's--since investors can put together whatever combination of debt, equity, and terms they want to calm their anxieties.

Getting Started

Gary Russell had never heard of private placements back in the spring of 1994, when a former camper, Paul Garofolo, boarded a Continental Airlines flight from Los Angeles to Cleveland and changed the course of NASC's history. Garofolo, now 38, read an article about the camp in the airline's magazine and decided to get back in touch with Russell, whom he hadn't seen in more than 20 years. After exchanging notes, the pair met a couple of months later in the lobby of a Sheraton Airport Hotel in Cleveland.

If Garofolo had been just another nostalgic ex-jock, the reunion might have ended with a cup of coffee. But he turned out to be a prominent sports-marketing figure with ties to big-name athletes in soccer, basketball, golf, and other sports. The owner of Signature Sports and Marketing in Cleveland, Garofolo had amassed an all-star rÉsumÉ, including stints with Major League Soccer, the World Cup organization, and Michael Jordan's agent.

"I looked at Gary across the table," Garofolo recalls, "and asked him, 'Why aren't you taking what you know about soccer and applying it to other sports?' "

Russell's reply was simple: "I don't have the contacts in other sports. And I don't have the infrastructure to carry it out."

"I certainly have the contacts," Garofolo told him. "And I don't have the money, but I know how to make it happen."

Russell was cautiously interested. He sent Garofolo copies of some of the university research he had sponsored about motivating children and building self-esteem through sports, and he explained his frustrations over the company's failure to win bank support. (NASC had lost its credit line years before, during a temporary business setback.) In turn, Garofolo introduced Russell to Jack Nicklaus, Jimmy Connors, and many other well-known athletes.

"It was incredible," Russell recalls. "Not only could I see that people really liked what we were doing with kids, but I could see that some of them had calculators going off in their heads--figuring out, if we went into eight different sports, with millions of campers in each, what could we make? The big question was, How could we get the capital to do it?"

Branching out into other sports would be a costly proposition. Russell's ongoing business concept was simple enough. During the off-season--fall through spring--he and his staff would approach community groups, sports clubs, park associations, and others about jointly offering a soccer camp for local youngsters for a week or two during the summer. If interested, the community group would sign up the campers and come up with the soccer field. NASC would handle the rest, which boiled down to hiring and training coaches to run a morning or afternoon program according to the company's curriculum and motivational philosophy. The beauty of the system was that local groups didn't charge Russell a fee for their involvement or ask for a share of the revenues. They were happy simply to have a quality summer program for their kids.

Building the Right Team

Garofolo had lots of ideas about ways Russell could position the company to raise capital and boost its growth rate. "I really believed that the company had blockbuster potential," he says. "Most of the sports-camp industry was mom-and-pop operations run out of somebody's basement with high school coaches running the program and their wives handling T-shirt requests. There weren't a lot of companies out there that offered the kind of high-quality training, curriculum, and other intangibles that Gary brought to the table."

Garofolo's recommendation: if Russell could finance the company's growth and set up barriers of entry to keep out the competition--by associating NASC with the major professional sports organizations and their icons--its opportunities would be limitless. He also thought that NASC could boost revenue growth by marketing more products to campers, especially if the products were tied to professional sports leagues or superstars.

By February 1995, Russell and Garofolo were talking to Jack Nicklaus's Golden Bear Co. about possible collaborations on golf camps that would be run according to NASC's curriculum and philosophy. The following month they launched similar discussions with the NFL. Russell smiles at the recollection. "When I think about Paul's activities back then, I think about the children's television show about Mr. Rogers and his neighborhood. Paul got us to visit another neighborhood, in fact, lots of neighborhoods, that I probably would never have had the confidence to visit on my own."

During the spring, NASC's staff worked with local lawyers to come up with an investment memorandum, which Garofolo shopped around to some of his business contacts. The goal was to raise $2 million to $3 million. The memo took a couple of months to draw up, and all it generated that summer were rejections.

It was a painful failure.

Paul Lawrence, NASC's president and one of the company's earliest soccer coaches, was convinced that the right money would come along when the time was right. "If we could impress all those professional sports organizations," he says, "I knew that the right financing deal would happen."

By August 1995, Garofolo decided that the company needed a new capital-hunting strategy, one that would be guided by professional financiers. He introduced Russell to some investment bankers, including Brown, Gibbons, Lang & Co., a well-connected firm that was also based in Cleveland.

Although the biggest Wall Street firms dominate the private-placement market--with Merrill Lynch, J. P. Morgan, and CS First Boston handling a whopping $38 billion worth of deals in 1995--regional bankers are more open to handling small private placements for small and young companies. With only $3.5 million in sales, NASC's fund-raising ability was limited. It wasn't simple to persuade even a regional banker to represent the company.

Bill Vogelgesang, the senior vice-president who ended up managing the private placement for Brown, Gibbons, is frank about his firm's early attitude. "This is a company where you go in at first and you think, 'It's small and it runs camps. That's not exactly the stuff of the Wall Street Journal,' " he drawls. "But from the moment you really get down to talking with Gary Russell and his people about the business and what makes it unique, you can almost hear a sucking sound as they pull you into what they're doing and how much they believe in it. They're almost evangelical. And a lot of very sophisticated people at our firm ended up being enamored of this company."

Most entrepreneurs don't realize that long before they succeed in selling investors on their company's potential, they first must convince an investment banker. With Russell setting his sights on raising $2.5 million--a ballpark sum that he, his key managers, and Garofolo had come up with--his company had a lot of persuading to do.

It wasn't easy. "They put my department through six weeks of hell" is the way Colin Redhead, NASC's senior vice-president in charge of finance and another former soccer coach, describes it. But the experience taught him the difference between the company's earlier failed forays into the capital market and a first-rate investment bid.

The investment bank conducted an exhaustive investigation into the company's financial history and infrastructure. "We don't do ourselves, the client, or potential investors a favor by going into a deal without testing the waters," explains Vogelgesang. Corporate minutes, articles of incorporation, audited financial statements: there wasn't a document of possible significance that slipped by Brown, Gibbons's attention. For companies with larger financial staffs and better record-keeping systems than NASC had back then, the due-diligence phase might have proceeded somewhat more quickly. But unless a company is always in the market for capital and has a sophisticated chief financial officer to supervise those activities, it's demanding to launch a private placement.

"Our early memorandum was full of our projected numbers about the company's potential sales and earnings," Redhead says. "When the Brown, Gibbons people came in, they didn't even care about our projections or that early memorandum. Their attitude was, if they liked what they saw, they'd come up with their own projections and draw up a memorandum the way they knew how to do it."

Reaching Out to Investors

By the end of September, the company's money prospects were looking stronger. Brown, Gibbons had decided to accept the assignment (for a fee, which ended up being 10% of the money raised and 5% of NASC's stock). That gave the CEO a team of advisers that included Paul Garofolo (who was focusing his efforts on building major-league and professional contacts) and Bill Vogelgesang (whose goal was to draw up an offering memorandum, come up with a list of potential investors, and circulate the company's vital statistics to groups that might be interested in a small, youth-oriented investment).

It was the toughest period the company had ever navigated through. While Vogelgesang started work on the offering memorandum, Russell and his staff successfully negotiated with the NFL to design and run a weekend-long pilot football camp that autumn. They were also heavily involved in negotiating a Major League Soccer affiliation and a pilot golf-camp program with Golden Bear. Topping it all off, they were entering their busiest sales season, when regional staff members started touring the country to sign up potential campsites.

To help NASC through the inevitable cash crunch that would accompany its early diversification efforts, Brown, Gibbons used its connections to help the company qualify for a six-figure credit line from a regional bank, its first credit in nearly a decade. Money helped, but it didn't eliminate the pressures on Russell and his 20-plus full-time employees in Norwich.

"Everything took longer with NASC than it arguably needed to," says Vogelgesang, who spent the next couple of months tracking down all the numbers and other details he needed for the offering memorandum. "But I couldn't blame them, because they were trying to run down so many different things at the same time--the financing, the different professional affiliations. You couldn't help but sense that this small company was being stressed. Gary was constantly reminding me that it wasn't his mission in life to be a full-time fund-raiser."

Russell learned from Vogelgesang and his team how to convey his message simply but confidently to potential investors. Fortunately, he has the gift of gab, as well as a passionate commitment to his business philosophy. And he was experienced at pitching his company to community groups and potential campers. All he needed was some training from Vogelgesang and his colleagues to be certain that he didn't scare off potential investors with too many details and not enough big-picture answers during preliminary conversations.

By the beginning of April 1996, Vogelgesang and his staff had finalized a 24-page confidential offering memorandum, complete with six appendixes describing the company's finances (with projected revenues of $5.7 million in 1997 and $10.6 million in 1998), job descriptions, and other key matters. Rather than mail out the entire book, he faxed a several-page executive summary to about 100 investors whom he considered good possibilities. Then he followed up with telephone calls. "A good positive-response rate is 10%," he reports. NASC was just about on target.

Gaining the attention of potential investors is far from simple. John Scott was one of the investors who received the summary. As a vice-president of Sirrom Capital Corp., a specialty finance firm in Nashville, Scott maintains relationships with investment bankers in nearby states in the hope of generating leads to promising small businesses. Sirrom Capital, with its $197-million loan portfolio, is scarcely a giant company, yet it receives about 150 financing approaches each month. "Had Gary Russell just sent this proposal in on his own, over the transom, we'd probably have told him, 'It sounds like a nice business, but we're going to pass,' " Scott says. "But I respected Brown, Gibbons's judgment enough to pay attention.

"If I'm interested enough to request the offering memorandum, I'll probably spend a couple of hours analyzing it, deciding whether I want to have an initial conversation with the business owner," Scott ex-plains. In the case of NASC, he decided he did.

Eventually, Russell had preliminary conversations--generally lasting between 60 and 90 minutes--with a handful of investors, either in person or by telephone. Vogelgesang arranged the first one with an investment group that was interested but not the likeliest of partners for NASC. That allowed Russell to view the conversation more as a dress rehearsal than a win-or-lose performance. "I was very nervous," he recalls. "I was afraid I would say the wrong thing and forget to say all the right things. I was very surprised by how long they kept me sticking to myself and my company's story--rather than getting to the numbers, which I thought they would want to do."

After the conversation, Brown, Gibbons staffers critiqued Russell's performance by giving him a kind of script that told him, "This is what you did naturally. Now let's look for ways to get your message across even more strongly." One conclusion the investment banker's group reached was that Russell gave such a powerful presentation that the presence of other NASC managers would serve only as a distraction. "The thing I learned, more than anything else," Russell says, "was that the most compelling part of my company's story, from a potential investor's viewpoint, was me."

Scott agrees. His initial conversation with Russell took place by telephone. "In one of those conversations, I'll ask a lot of questions to try to identify where the real risks are in a business. But in the end, what I'm trying to do is get a real sense of the business owner. How passionate is Gary about his company and his prospects?" He pauses. "I've been making deals for 10 years now, and I can tell you, I'll be off the phone in 15 minutes if a business owner comes across as lackadaisical or lacking in energy."

Finding the Right Fit

The chemistry between Scott and Russell was good, so when the investor suggested a trip to Sirrom's Nashville office, the CEO happily agreed. He went in May, along with Bill Vogelgesang, to give a full-scale, three-hour presentation.

"It might seem as though we're far along at that stage, but the reality is it could still have fallen apart," Scott says. "That is the time to be pessimistic, to really challenge a business owner about whether his company and his deal make sense." Scott and his colleagues liked Russell. They did feel, though, that his fund-raising target of $2.5 million was too high, based on the company's current numbers. It was time for Sirrom's own investigations to begin.

One reason private-placement investors don't sway in the wind every time the stock market rises or falls is that they usually perform elaborate due-diligence investigations themselves--on top of the investment bankers' reports--or confine themselves to those industries they know very well. In NASC's case, since the company operated in such a specialized business niche, Scott was forced to rely on more unusual research efforts, which included evaluating the company's sports-merchandising potential through an athletic-shoe retailer he knew.

By mid-May 1996, Scott faxed a one-page financing proposal to NASC's headquarters. Its purpose was to lay the groundwork for future conversations--although a final offer could still be withheld if Sirrom learned anything about the company that gave it pause. The proposal offered a five-year loan of $1.5 million, with the potential for another $1 million to be provided if the company met a series of performance objectives. The interest rate to be charged was 13.5%, with a 2.5% fee attached to the deal.

Private placements run the gamut from all-stock deals to debt-and-equity combinations of all varieties, depending on the investor's threshold for risk and the company's financial strengths and weaknesses. The deal NASC was offered was pricey, of course, but it had some strong advantages. Sirrom wanted warrants for only 16% of the company's stock, compared with the majority stake most venture capitalists would have required. Another plus was that Sirrom didn't insist on one or two seats on Russell's board. All in all, the deal looked pretty good.

By early June, Scott was ready for a final visit to NASC's Norwich offices. He wanted to meet Russell's team of executives, tour the facility, and develop his own sense of whether the company's infrastructure could handle accelerated growth if it happened. It was also a good time to get a sense of the coming summer's business realities, which added up to 725 soccer camps with about 50,000 campers; 150 football camps for about 12,000 kids; and 64 pilot golf camps for about 4,800.

Scott flew from Nashville to Hartford on a Wednesday afternoon in mid-June, raising the anxiety level at NASC's headquarters to a torturous pitch. Russell had been awake most of the night before with bad dreams, mostly about rejections from either financiers or potential sports partners. He'd spent hours choosing the waterfront restaurant in the nearby village of Mystic where he and Paul Lawrence would dine with Scott and Vogelgesang.

"This is the most important 24 hours in our company's history" was the way Colin Redhead felt as he drove to the airport to pick up Scott and Vogelgesang, prepared to answer whatever financial questions they might have for him along the way. Dinner was a relatively relaxed, even enjoyable, three-hour affair. But the next day Scott resumed his intense investigation.

"Since I'm not a financial person, there were times when John Scott would ask an investment-banking-type question in language that just wasn't in my vocabulary," Russell recalls. "At those moments, I just let Bill Vogelgesang take over. But I wouldn't call those awkward moments. They were growing moments for me because I was still learning as I was going along."

At one point, though, late in Thursday's conversations, Scott finally asked the question Russell had dreaded for months. "I notice that your numbers dropped eight years ago. Can you explain why that happened?"

"My guess," Russell says, "was that Scott had already talked to our investment banker about it but wanted to see how I'd handle the question." The truth is the dip was tied to a painful incident that Russell still had difficulty discussing with anyone. But he knew he couldn't risk losing the deal by being anything less than completely honest.

"There were two reasons," he explained, although he immediately wished he had just mentioned one. The first problem, Russell told Scott, was that the company had grown too fast, with sales overshooting its collections ability, and cash flow unable to support the new growth.

"What was the second problem?" Scott asked.

In his glass-enclosed, circular conference room, Russell finally made his confession. "There was a guy who had worked with us for years, whom I would have trusted with anything. He and a new employee went to a bank meeting, back in the days when we did have a credit line, and gave our bankers some financial reports that I hadn't examined as closely as I should have."

As a result, it looked to NASC's bankers as though the company had lost $250,000 during the preceding year, instead of the $40,000 it had projected. "I didn't believe it was true," Russell explained, "but I was so completely taken by surprise that it took me eight weeks to figure out what had happened and prove that I was right."

NASC lost its credit line immediately because of that bankers' meeting, the two employees soon left the company, and Russell almost lost NASC while he struggled to find the cash to pay down its outstanding balance. "I'm still embarrassed by the story," he confessed to Scott.

But the investor was satisfied by his openness. "Every company we've ever dealt with has had something they'd rather not talk about. What matters is what you learned from this," said Scott, "which was putting better systems, with checks and balances, in place." By the time Scott left for the airport, Vogelgesang and Russell were convinced that an offer was imminent.

Finalizing the Deal

It was. The following day, Sirrom faxed a final set of financing terms to Russell, which looked pretty similar to the terms it had originally proposed in May.

"The reality is," Scott says, "there's not too much competition on private placements until you get to about $5 million in size. I don't have to negotiate too aggressively on a deal like this because I've either got to believe that I've got a pretty good chance of earning a 20% to 30% rate of return on my money, once we factor in the interest and equity potential, or I'll go on to the next deal."

Russell agreed with the terms. Then he experienced the closing to end all closings. "If you've ever closed on a house, multiply that awful experience by 10," he says. "I had more faxes and more papers to sign than Jack Nicklaus has golf clubs." One conference call between Sirrom's office and NASC's lawyer, accountant, executive team, and marketing employees lasted more than an hour and a half. "It was kind of like, do you have the fingernail clippings of your grandmother from when she was 90 years old?" Russell muses.

There were endless paperwork issues to resolve. "Sirrom wanted us to set up formal management contracts, which we'd never had before," explains Russell. Those were complicated by the equity stakes he planned to turn over to each member of his management team once the closing took place. "We also had to formally set up a holding company, with subsidiaries for each of our new and existing sports divisions," he says. Some holdups in the NFL negotiations slowed things down, but Sirrom eventually agreed to close while that contract was still unresolved. The closing finally took place on Wednesday, June 26, just about two years after Garofolo's fateful plane ride from Los Angeles. But surprisingly enough, it was almost anticlimactic, since it took place by fax.

"There was one final crisis, because we expected Sirrom's money to be wired to us by 2, but we didn't get it," Russell recalls. "At 2:30 they called us to say, 'We're done. You'll get the money.' But it still didn't come in. Our bank was getting ready to close at 5," the CEO says, a smile finally breaking out on his face. "They called us at 4:55 to tell us it had arrived."

That night, Russell and his wife took their kids out to dinner to celebrate. He sent flowers to the team at Brown, Gibbons and planned an end-of-the-week champagne celebration for his employees and some of the company's local business supporters.

And, as always, he waxed philosophical about the fund-raising process that had finally come to an end. "We don't hear enough about day-to-day heroes. There are a lot of people who worked very hard to help our company find an operational way to make our dream happen. They earned fees, true, but they also accomplished a tremendous amount." He pauses, leaving little doubt about how he inspires all those campers, then adds simply, "I'm filled with a tremendous sense of pride in our team."