Partners in the News:
investment community is a thriving source of private capital.
from Minnesota Technology magazine, March-April, 1999 by permission)
only way Karl Groth could get a healthy bottom line was to get an
injection of capital. His medical device company, First Circle
Medical, Inc., in Columbia Heights, needed cash to finish engineering work
for its breakthrough product, a hyperthermia device that treats patients
with AIDS, Hepatitis C and certain cancers by heating their bodies to 108
also needed money to complete some basic research work on hyperthermia,
build some devices and cover the regulatory cost of bringing our product
to market," says Groth.
figured his options could be summed up in two words: private placement.
private placement is a source of financing that does not involve a public
stock exchange. The term covers a wide variety of ways in which a
person or business entity may invest in a private company.
Placements vary in how the deal is structured with regard to ownership
position, exit strategy and a host of other considerations. Perhaps
the most appealing benefit of private placement is that it raises equity
capital as opposed to creating debt.
common sources of private capital are:
net-worth individuals. Commonly referred to as
"angels," these experienced investors have the financial
wherewithal to take a potentially risky investment position in
capital. A more formal approach to raising money, venture
capital firms are always on the lookout for promising new companies in
which to invest. "When you take that road," notes
Groth, "you usually have to give up much more of your
company. For example, venture capitalists may demand a high
percentage of ownership, right of first refusal and seats on your
partners. Some companies have an interest in a young
company's technology and are willing to invest in the company to get
closer to it.
money. Many retirement funds and other types of
institutional accounts commit a percentage of their portfolio to
higher risk investments.
important to note that private placement refers to the character of the
investment's destination, not its source. The last two options above
may involve getting money from publicly held corporations but the
transaction remains private as long as the investment is not registered
with a public securities exchange.
of the real challenges for any entrepreneur is to manage cash flow and
anticipate needs," points out Larry Arnold, a private investor who
retired six years ago from the investment banking firm of Wessels, Arnold
& Henderson (now Dain Rauscher Wessels).
entrepreneur with a good idea is going to need capital," says
Arnold. "There may be a founder's round for a small amount of
capital just to get them started. Then he or she needs to raise more
serious money maybe six months later. As a company grows and
progresses, it will typically need to raise additional capital.
Before a company goes public, it's not uncommon to see three or four
rounds of private investments."
infusions of capital dilute the entrepreneur's stake in the company.
"By the time a company is ready to go public," says Arnold,
"it's not uncommon to have the founder own less than 10 percent of
the company. But you're better off owning 10 percent of a going
concern than owning 50 to 75 percent of a company that has no value."
compelling reason to consider private placement is the expert advice that
is usually attached to the money.
basic idea," says Mac Lewis, president of Sherpa Partners in Edina,
"is if entrepreneurs have a vision and want to go climb a mountain,
they should take along someone who's been up the mountain
before." Lewis, himself, founded a very successful Dallas
software firm in the early 1980s.
and his three Sherpa Partners associates won't even consider investing in
a company unless an entrepreneur also welcomes their assistance in non-financial matters.
found that the best investments are the ones we're interested in enough to
get personally involved with," explains Lewis. "It's a
good gut check-- if we're not interested enough to spend time with and
provide assistance to an early-stage company, why would we want to put our
money in there?"
is also managing general partner of Minnesota Management Partners, a $3 to
4 million fund fully invested in 13 Minnesota companies, four of which
have welcomed him onto their board. "There are a lot of good
ideas here in Minnesota and a lot of good people who can run the
companies," says Lewis. "We'll invest in the ones in which
we are interested and invited to take an active role."
Investors Look For
order to attract investors, of course, a growing business must put its
house in order. "First, management needs to put together or
update the business plan," says Jerry Okerman, who manages 3M's
corporate venture program. "Then they incorporate that as part
of a private placement memorandum, which also includes an overview of
their company and their vision as well as their strategy for achieving
that vision. All that would be reviewed by their lawyers and
accountants and be given to potential investors, whether individuals,
institutions or venture funds."
potential investor looks for three key factors before investing, says
Okerman: a strong management team, a proprietary position on the
products (usually in the form of a patent) and the ability to achieve $100
million in sales within 5 years.
an important part of building an early-stage company is building the
team," agrees Lewis. "We try to help by performing interim
management roles and also help with building the ongoing team. The
leadership team includes the board of directors and the executive
leadership, as well as the investors. Our goal is to find the kind
of investors that are most appropriate for what each company is trying to
critical that the right company gets hooked up to the right investor, adds
Lewis, who relies on his extensive network to play matchmaker if Sherpa
Partners decides not to invest their own resources. "There are
some very good investment banks in town that help early-stage
companies," he says. "Or it may be more appropriate for a
company to look to more traditional venture capital investing. We
also help companies research the venture capital environment to determine
which firms would be interested in their particular field."
an entrepreneur needs financing and doesn't know where to begin looking
the Internet provides a good place to start. For example, at www.vfinance.com
one finds The Venture Capital Resource Library, an extensive directory of
venture capital resources and related services.
helpful local source of information is The Collaborative, a Twin Cities
organization serving growth-oriented, emerging-market companies
statewide. "We try to stimulate growth of companies through the
collective knowledge and experience of our more than 700 members, who are
entrepreneurs, managers, investors and professionals," says president
Dan Carr. "Companies can gain visibility through our
Collaborative offers its members 20 programs a year, a fall conference on
venture finance and a quarterly journal called New Venture Review.
This way the organization offers a means by which high-potential, young
private companies can gain exposure to investors and other entrepreneurs.
someone is resourceful enough to start a company, they're resourceful
enough to find investors, contends Arnold. "Early on, people
usually tap their friends and acquaintances. Then they begin to
network around town to find individual investors. The Twin Cities
are very active in that area; there are a lot of 'angels' here who have
been entrepreneurs themselves and are willing to back people who have good
the entrepreneur moves beyond the start-up stage and has a
well-thought-out business plan, says Arnold, it may be time to solicit
introductions in the more formal venture capital community. Keep in
mind that a venture capital firm will only invest in a fraction of the
companies that approach them.
your name begins circulating in the investment community, chances are good
that the right person will hear it. The Minnesota Venture Capital
Association is an informal group of about a hundred venture
capitalists. They convene every other month to network and try to
stay current with the issues affecting their industry, says the
organization's president, Ed Spencer. He also serves as CEO of
Affinity Capital, his own Minneapolis venture capital firm. The
association includes all the major venture capital firms in the state as
well as some private investors.
source for venture capital is MIN-Corp., an independent nonprofit
organization spun off from Minnesota Technology, Inc., on July 1,
1998. "It's an investment company that makes investments in
small to medium-size privately owned technology companies in
Minnesota," explains Jerry Okerman, who also serves as MIN-Corp.'s
chair. "We focus primarily on rural areas. Our guidelines
state that 80 percent of investment funds need to be invested in companies
outside the seven-county metro area."
aggressively pursuing one referral after another, Karl Groth raised $2.5
million in the last half of 1997 from more than a dozen angels and two
strategic partners, Phillips Plastics, located in Phillips, WI, and
Adventist Health Systems of Orlando, FL.
to the private placement, First Circle Medical had six shareholders and a
valuation of $9.6 million. The company now has 20 shareholders and a
valuation of $14.6 million. Groth, who has already initiated a $6
million second round of private financing, has given up 20 percent of his
company so far but hasn't regretted it for a moment.
love building companies," he says. "I love the financial
side, the funding side of it. You're basically selling your
company. You're putting together a story, going out to the
investment community and selling opportunity. It's a lot of
Bolsta is a freelance writer living in Minnetonka. He covered
factoring in the January-February issue of Minnesota Technology.