• Show me the money: Where to find capital in the new economy
  • December 22, 2009 | Author: Mitchell R. Cohen
  • Law Firm: Flaster/Greenberg P.C. - Cherry Hill Office
  • The current economic crisis that has so negatively impacted our country's corporate performance and real estate marketplace has had similarly devastating effects on the venture capital and equity funding arenas. Three short years ago, the venture capital and equity markets  resembled a financial smorgasbord of funding sources, including angel investors; venture capital/equity firms; institutional structured finance houses; mezzanine lenders (equity disguised as debt); capital arms of REITS and other public entities;  IPOs and subsequent public offerings; and off-shore funds.  Today, that plentiful buffet of opportunity has dwindled to an almost empty cupboard of sources for venture and equity funding.

    A New Reality

    Our new world consists of painfully tight money supplies, lenders with an aversion to lending, and almost nine trillion dollars of cash standing on the sidelines more willing to remain there than a veteran quarterback looking for his last career paycheck. In this atmosphere, where can our start-up enterprises, second stage companies and mature entities ready for growth via internal expansion, mergers or acquisitions look for their necessary capital?

    The good news is: The money is out there. The bad news is: Getting it will require a high level of diligence; the pursuit of multiple, many-faceted potential solutions; an extremely competent management and financial team; and a financial history or a "proof of viability" unlike that seen in recent generations.

    Where do you turn? Although scarce, there are venture capital and private equity firms still doing business in the real estate and non-real estate sectors. They are selective and can demand a level of due diligence and rate of return and equity slice that will eliminate most suitors.  With our scarce equity sources in the U.S., off-shore funding can fill a small part of the gap, but logistical, legal, monetary and cultural issues may create significant impediments.

    Opening Up the Pipeline

    Creative measures can be taken to open up this restrictive funding pipeline. Look for a prospective joint venture partner in your industry to team up with and supply needed expansion or acquisition capital. This is not an easy task and requires extensive research and due diligence, confidentiality protections, the right "team" fit and extensive contractual/legal work. A joint venture arrangement can provide your company with the benefit of expertise in areas it does not currently possess, the financial strength of the combined entity in terms of senior debt, equity and vendor relations and, perhaps, a basis for a long term relationship, possibly even a future merger or acquisition opportunity.

    Search for an institutional partner, such as a university, non-profit organization, private-public partnership or quasi-government agency to fill the funding void. Success stories abound in the high-tech, bio-tech and other fields where partnerships between educational institutions, ranging from major research universities to community colleges, and entrepreneurial businesses have created incubator and mature company project opportunities. Non-profit organizations, such as business development entities, have either provided or facilitated funding to businesses viewed as enterprises that can provide job opportunities and tax ratables to a community in need of redevelopment and growth. With TARP, stimulus and green energy program funding (sponsored, depending on the program, by federal, state or in some occasions local governmental or quasi-governmental entities) being infused into our economy at this most precarious time, the available pool of funding in today's marketplace has received a much needed boost.

    Consider a trip up or down the vertical "supply" chain and join forces with a powerful and/or well-heeled vendor or customer, where benefits to both parties can result from the capital infusion source. This endeavor (partnering up with vendors, suppliers, customers, etc.) is laced with potential minefields, including inherent business competition conflicts, but should not be overlooked as an equity/venture funding source. A vertical joint venture arrangement brings to the table the talents of both entities and can provide creative insights into ways to obtain equity or venture capital.

    Finally, if all else fails, concentrate your efforts on further solidifying your company's financial condition (including your balance sheet, EBITDA, cash position and leverage) and be prepared to act as soon as improvement in economic conditions or your company's financial status warrant. Many companies look to expand, merge or seek acquisition targets before their own financial house is in order. Liquidity, low debt, profit history, an operational track record and a solid management team are key factors when attempting to secure equity or venture capital. The more stable you are internally, the easier your funding search will be.

    Conclusion

    In these dangerous economic times, it will be necessary to work harder and smarter.  But -- there are funds out there for your growth and expansion needs if your company is strong enough and if you are willing to dig in, look hard and be creative.