A Little Money, a Lot of Hassle
By Lisa Bergson
Try raising a small amount of money. These days, the business press is full of reports on the bleak prospects for companies seeking venture capital. Ever since the dot-com debacle, investors have been gun-shy about technology and prone to impose harsh terms in exchange for their support. Under the circumstances, if all you are looking for is a relatively small injection of capital into a highly promising company that has already proven its viability and is indeed close to turning a profit, you might expect to have an easy time of it. And maybe we will.
One thing is for sure, though: the old rules of the New Economy no longer apply. Instead, what I'm finding is a murky, contradictory set of injunctions and expectations. My lawyer, my advisers, my board, and the various experts I've consulted all have differing views about everything from sales projections to presenting potential markets.
DOLLARS AND SENSE.
They agree on one thing, however: As Joe Hawke, general partner of Meridian Venture Partners, a $150 million private-equity fund, puts it: "Everyone will try to get you to raise more money." He couldn't be more right. I can only imagine how irresistible all that ready cash must have been to the dot-com kids. The only exception I encounter is Tom Balderstan of Balderstan Capital, who manages a private family fund. "Ask for what you need. Do the sensible thing," Tom counsels.
The rest are as seductive and determined as drug pushers on a corner of the South Bronx. "You need to ask for more money," insists an intermediary we consider hiring. (Whether you even need an intermediary, also known as a placement agent, is a question in itself.) From a venture-capital perspective, "it's as much work to negotiate and oversee a small investment as a large one," he explains over coffee in our board room. "If you have a $100 million portfolio, it's easier to manage ten $10 million investments than twenty $5 million ones." Not to mention the fact that his firm gets a much more attractive commission on the deal.
"That's stupid," I blurt. "We know what we can absorb. We want to handle this in a measured, staged way and not take on so much financing that we wind up making bad decisions. Look at what happened to the dot-coms. I know people who were part of that, and they really regret the 'more, more/faster, faster' approach the VCs foisted on them."
NICKEL AND DIME.
"We don't do raises that small," he sniffs before abruptly stalking out. My mentor from Brown Brothers Harriman is consoling. "If he didn't like your plan, he shouldn't have made an appointment to meet. Unfortunately, the VC pond is stocked with many similar fish..." Nonetheless, he recommends against "going it alone – especially if you've never raised capital." As he sees it, "The intermediary will manage the process, facilitate introductions, and make sure your book gets read."
Others including my lawyer, Mike Heller, contend an intermediary doesn't make sense for a deal our size. Handsome and relaxed in a knit T-shirt of sage silk, Mike clearly relishes the art of the deal. Although he has studied our plan, he can't resist: "Why don't you go for more?"
"Because what we're asking for is enough, combined with our other sources of capital and sales revenue," I explain. "Once we build it up, we can go for another round in a couple years. By then, we won't have to give up so much." Mike nods with what I take for approval.
"For that amount of money, what you're really looking at is a friends-and-family round," he says, leaning back in his chair.
"Are there just no VC firms or angels we can approach?" I ask.
FISHING FOR NIBBLES.
He leans forward, notes in hand and rattles off the names of three or four local firms so quickly I can barely take notes. We agree that once I make some minor revisions to the plan, he'll circulate the "Executive Summary" among them to see if we get any nibbles.
Meanwhile, I start to think about my dear friends and family. It feels awkward, untoward really, asking them for money. Although not poor, mine is hardly that kind of family. Worse, I don't want to put friends who happen to have money on the spot. It just seems wrong. My father didn't raise me to do such things. (Of course, he didn't raise me to run a business, either.)
Still, if it's such a good opportunity, don't I owe my friends and family a shot at it? "You have a very exciting product with prospects for substantial growth," Joe Hawke observes. Why should my friends be the last to know? I decide to start with my Advisory Board, folks who are familiar with both the business plan and the business. "We're open to small investments," I tell the first two I contact. Their reaction is spontaneous. They want in. And I'm meeting with three more board members tomorrow.
I see a small pot of gold in my future.
Lisa Bergson is President and CEO of both MEECO and Tiger Optics. Before joining MEECO in 1983, Lisa Bergson worked as a business journalist at BusinessWeek and freelanced for many business publications. You can visit her companies' Web sites at www.meeco.com and www.tigeroptics.com, or contact her at email@example.com