More, Please! Part One of a Series

It takes money to make money, and it takes a lot of legwork to attract money to finance growth — even in this era of seemingly free-flowing dollars for dot-com start-ups. Here’s how to get your fair share.

In 1998 Family Christian Stores Inc. was looking to raise capital to fund future growth and provide liquidity for investors from the 1994 leveraged buyout of the retail chain. Rather than focusing solely on either taking the company public or raising venture capital, Craig Wassenaar, the company’s executive vice president and CFO, opted to simultaneously pursue both options.

Although this strategy may sound unusual, it paid off for Family Christian Stores, a Grand Rapids, Mich.-based retailer with about 350 stores in 37 states. "The parallel track made us very efficient," Wassenaar said, because much of the preparation for an initial public offering (IPO) mirrors steps for obtaining venture capital funding. More important, when the IPO market went soft in the summer of 1998, Family Christian Stores was able to quickly and easily shift completely into pursuing venture capital funding. The company was able to access the capital it needed and postpone its IPO, rather than succumbing to pressure to go public in a questionable market.

If there is a lesson to be learned from Family Christian Stores’ experience, it is that companies must be prepared for anything when raising capital. This lesson is particularly relevant in today’s environment. Although it often seems like an endless abundance of capital is available, finance executives must prepare extensively for a search for financing.

Dot-Com or Not Com?

Is this the best of times or the worst of times for companies looking to raise capital? For the most part, the answer depends on who you are. "E-commerce start-ups have raised capital with an ease and in amounts that one would consider historic in terms of proportions," said Stewart Cohen, CEO of Paragon Capital LLC in Needham, Mass. "With so much of the focus being put on that area, it’s been hard to attract capital to the more conventional opportunities."

"Many venture capital funds that previously focused on non-tech deals are now looking for Internet-related deals," agreed David Stone, a partner with law firm Seyfarth Shaw Fairweather & Geraldson in Chicago. Overall, "it seems that many deals are getting done, but even more people are out searching for capital."

So, where does that leave non-Internet companies with strong operations, growth trends and income that represent the "old" schools of thought? "Those companies should still be able to find capital from the established venture capital firms, and banks are continuing to lend money," said Stone. "Until interest rates rise further and banks begin to spend more time on restructuring loans, this may be a good time to borrow funds."

But changes to the banking industry have affected companies’ access to capital. "Large banks don’t have the appetite for middle-market companies, and regional lenders have been gobbled up in roll-ups," said John Erickson, CFO of American Capital Strategies Ltd. in Bethesda, Md. As a result, "it is hard to know where to go [for funds]."

Companies that are planning to go public may also encounter changes in the IPO market. "The capitalization required to gain investor interest has increased," said Erickson. In the past, a company worth at least $100 million would garner investor attention. However, in today’s market, companies need $500 million to $1 billion to attract interest. "This has an impact on these companies’ ability to raise capital," he said.