Monday, September 3, 2007

The Corner Office

'Dueling Banjos' delivers true ring in tech circles

By Tim Platt

The iconic "Dueling Banjos" seems to echo through the halls of some technology companies these days, as normally aggressive and über-confident executives strive against long odds to win the trifecta of rapid growth, sustained profitability and continued independence. The ticket often has a high price -- specifically, large amounts of low-cost capital.

Why "Dueling Banjos"? In an early scene from the '70s movie "Deliverance," British director John Boorman defies expectations: suburbia's guitar is outgunned by a hillbilly's banjo in a gripping instrumental. The image is durable: fears of loss and hopelessness pervade this tale, as self-assuming good guys journey into uncharted, murky territory.

In the tech world today, the good-guy CEO has already overcome long odds to survive the first year, launch her first product and power accelerating revenue. But having access to sufficient capital (whether generated from operations or from investors) is just as difficult for tech companies as it is for their old-economy peers.

Nor is there any shortage of advice on strategies and tactics for navigating these capital shoals: investor capital call; refinancing or leveraging the balance sheet; another round of venture capital; equity investment from a strategic partner; a joint venture with an equity partner(s); a partial or complete sale of the company; and, for young or microcap public companies, PIPE(s) -- private investment in public equity -- or going-private transactions. And the list goes on.

In staring down these choices, the tech executive must to some extent feel like Ronny Cox's character, Drew Ballinger, in Deliverance, because in most cases prior success does not make it any easier to identify the correct path forward for his company. Nor is the advice from the board and independent advisers always consistent: "Go for the low-cost capital, and get lots of it. Find the smart investor who can help you organizationally and commercially, even if the cost of equity is greater. Form a special committee of the board. No, hire an investment banker. No, do both. Delegate to a corporate lieutenant. Recuse yourself from the process, to avoid conflicts of interest and to focus your efforts on the company's growth. Stay personally involved, because this is critical to the company's prospects."

The drum beats on, often at a feverish pitch. As the company craves more cash for marketing, sales, R&D, and product development, the volume and intensity of the duel intensifies. It is a muse worthy of classic mythology.

How to avoid succumbing to fear of loss, even hopelessness, and the fate of Drew Ballinger, whether in the instrumental quest for capital or in the corporate rapids of overheated growth? Who are the Moerae who will guide their fate?

This is indeed a journey into murky and uncharted territory, because every company's sector, technology, commercial opportunity, market window, and people are different. Compounding the risk are varying demands of the capital markets, ever-present effects of externalities and inefficiencies of private equity, generally. So there is no one-size-fits-all approach.

Nonetheless, a few principles may serve as useful analytical tools in confronting the challenge. The CEO usually has the best understanding of the commercial opportunity and what it requires to be successful. She probably also has the best sense of the patience and expectations of the key shareholders and other investors, and thus has the most balanced view of the capital needs of the company. Thus, the CEO must be involved in guiding the capital formation process and communicating that vision to the investment community.

She should solicit advice from multiple sources, and not just the corporate lawyers and bankers, who may have a risk-averse or merchant bias. Based on such factors, she should hold discussions with multiple potential capital sources, and seek out expressions of interest and ultimately firm proposals from those investors that seem to be best aligned with the company's strategic direction.

Finally, she should suspend direct individual involvement only when or if it becomes clear that she would have a conflict of interest, such as where she decides to join a private-equity or management buyout bid for the company.

Tim Platt is the director of Preti Corporate Finance, with offices in Boston; Portland, Maine, and Concord, N.H. He can be reached at tplatt@pretifinance.com.