Friday, September 5, 2008

The Corner Office

Finding private capital in a down economy

Nada, zero, zilch: that’s the number of IPOs launched by U.S. venture-backed companies in the second quarter of 2008, according to a Dow Jones VentureSource report in late August.

That’s the first IPO goose egg in five years, reflecting the second-longest running drought since 1992, with no IPOs for 103 days. The longest IPO drought lasted 145 days, from Dec. 18, 2002, through May 12, 2003.

It coincides with a steep year-over-year decline in New England venture-backed financings in the second quarter, which dropped 22.4 percent in value and 31 percent in number of deals.

These are daunting figures for entrepreneurs, business startups and companies seeking growth capital. Financing rapid growth is one of the tasks facing small business, and becomes an even more difficult challenge when the private capital markets are unusually illiquid and skittish.

The problem becomes even more acute in a struggling economy, with relentless increases in the costs of energy, transportation and raw materials, and the rippling effect of these increases on demand in the end-use markets for a company’s products.

So what resources are available to a small-business owner, beyond hitting up friends and family for seed capital?

The short answer is that there is no established exchange for businesses to find investors, or for investors to find promising companies, nor is there a single standard or repository for publicly available information to make your company known to the investment community. Historically, the private capital markets have been very inefficient, with the result that access to capital for a private company is constrained.

Online networks — such as OpenDeals by AngelSoft — have attempted to fill this void by allowing investors to screen applications prepared online using a common format. There are also published directories of angel networks, such as Mass High Tech’s 2008 Tech Services Directory, published in June.

These networks represent good sources, but still lack the benefits of a warm referral from deal-makers in the banking, accounting and legal professions and a compelling elevator pitch delivered face-to-face by an engaging business founder.

From an academic perspective, you can learn about the process and historic and current data from gurus like The University of New Hampshire’s Jeffrey Sohl, director of the Center for Venture Research and professor of entrepreneurship and decision sciences at the Whittemore School of Business and Economics. Sohl has long studied the private capital markets and is one of the leading spokespeople in the field.

Regionally, there are groups like North Carolina’s acclaimed Council for Entrepreneurial Development (CED), a private, nonprofit organization with more than 5,000 members working to identify, enable and promote high-growth, high-impact companies and accelerate the region’s entrepreneurial culture.

In New England, similar groups sponsor conferences and symposiums like youngStartup Ventures’ 2008 Life Sciences & Healthcare Venture Summit and 2008 New England Venture Summit, as well as the Vermont Ventures Network’s Vermont Investors Forum.

For an opportunity to make your case directly to several groups of interested investors, there is nothing like a speed venture event, where entrepreneurs pitch their growth story in a series of short meetings.

Speed venture programs were once popular in New England, but fell out of favor with the last market down-turn six years ago.

Recently, they have begun to reappear in other parts of the country, making a splash in such tech centers as Seattle, Silicon Valley and Chicago.

Recognizing a pressing need to promote capital formation to help rejeuvenate the regional economy, the New Hampshire High Technology Council has recently announced that it has teamed with the NH Small Business Development Center to host the region’s first Speed Venture Summit in many years on Oct. 28, in Manchester, N.H.

According to Jesse Devitte, co-founder of venture capital firm Borealis Ventures, “This is an exciting opportunity for investors to meet the next generation of great entrepreneurs and learn firsthand of their plans that will power the region’s innovation and job creation.”
 

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.