In the life cycle of growing companies, it seems that the planting and the harvest get the most attention.<\/p>\n
In East Tennessee a lot of talk focuses on seed funding – the early investments that help new companies plant roots and, hopefully, find their niche in the marketplace.<\/p>\n
There’s also much fanfare when a company grows up – typically with a few hundred employees and more than $100 million in sales – and debuts as an initial public offering, a sign that the business has matured enough to become a good buy for the everyday investor.<\/p>\n
But often getting from “family, friends and fools” financing – as local investment broker\/dealer Neal Culver calls it – to an IPO, when founders finally tap into big cash and see the fruit of their labors, takes additional infusions of cash.<\/p>\n
For the past several years a few local firms, including Culver’s company – TrustFirst – have been in the business of helping local companies get those interim investments, raising private equity rounds through a network of primarily local investors.<\/p>\n
That number is growing.<\/p>\n
In January local entrepreneur John Smolik and recently returned Knoxville native Walt Williams launched Wells Grey Capital, a partner with Dallas-based venture-capital firm Wells Grey Financial Group Inc., to help local and outside companies raise money.<\/p>\n
And Coulter & Justus, a Knoxville-based accounting firm, recently launched C&J Capital Advisors, a service that will tap some 1,700 private-equity firms across the country for funding for local companies.<\/p>\n
Each firm has a slightly different approach, but most are looking for the same thing: companies beyond the seed stage that have a large potential market, solid management and, often, revenues already coming in the door.<\/p>\n
Managers at the investment companies say their services fill a niche that typically conservative local banks don’t and friends and family can’t.<\/p>\n
“For any particular project, there is a way to put together an investment package,” said John Atkins, managing director of C&J Capital Advisors. “Companies here don’t understand how they can use private capital. There are many thing that banks don’t do that are very much worthy to be done.”<\/p>\n
Small time staples<\/p>\n
For Mike Crabtree, CEO and chairman of start-up IdleAire Technologies, private placement – investments raised through a pool of individual investors – has become his preferred method of fund raising because of bad experiences with national banks, tough collateral and securities requirements of local banks, and venture capital firms that require too large a stake in his company. IdleAire builds technology that provides truckers with overnight services such as air conditional, television and Internet in their cabs.<\/p>\n
A New York bank required exclusive fund-raising rights for two years, fixed fees and up-front payment for expenses without guaranteeing it would raise the money IdleAire needed, he said. In the end, the bank didn’t get the financing and IdleAire’s money came close to drying up, Crabtree said.<\/p>\n
On the other hand, he said, local banks don’t like to loan money to companies without sufficient cash flow or collateral to secure their loans. A start-up has neither, Crabtree said.<\/p>\n
“Banks don’t loan money to people unless they have money,” Crabtree said.<\/p>\n
Crabtree said IdleAire is working with TrustFirst to raise $50 million for its next round of financing.<\/p>\n
Monty Montgomery, a local banker who recently helped launch FSG Bank and also has dabbled in venture capital, said banks can’t invest in start-ups because of the risk.<\/p>\n
“We’re not able to,” he said. “They (start-ups) have no capital.”<\/p>\n
Because banks are federally regulated, Montgomery said, they can’t exceed a very narrow window of loss. As a result, he said, it is very difficult for a bank to participate in a venture-capital deal with its inherently great risk.<\/p>\n
These days venture-capital groups are more cautious, too, and they’re also hard to come by. Montgomery’s former venture firm – Montgomery, Payne & Bibb Equity Investments – closed without raising any money or making an investment. (Montgomery’s partner Skip Bibb is continuing private equity work on his own.)<\/p>\n
A number of other local venture firms also have come and gone. Locally, Southeast Capital Partners remains the only venture fund, and it has closed following the rejection of Small Business Investment Companies status by the federal Small Business Administration. The fund’s future is awaiting a vote of its investors.<\/p>\n
Today’s players<\/p>\n
The absence of investment banks and venture capital has left local fund-seeking firms a handful of financial-services companies that raise private placement funding as part of the investment services they offer their clients.<\/p>\n
TrustFirst taps into a primarily local pool of 300 to 500 accredited investors – individuals worth at least $1 million with individual incomes of $200,000 or with household incomes of $300,000 – to raise private rounds of capital for one or two clients per year. The money typically is used to help a company expand or make a capital investment that will help the business grow.<\/p>\n
In the past, Culver said, the company primarily invested in small IPOs through the National Investment Bankers Association. In the stock market’s heyday, raising money through fairly small IPOs proved a popular and highly successful investment route, he said.<\/p>\n
But since the market’s crash, Culver said, “what we’re seeing a lot more now is private placements.” That’s both because of the market’s condition, he said, and because new securities regulations have made the IPO process more cumbersome and expensive.<\/p>\n
“Truthfully, this private placement business is a bigger and bigger part of what we do as a broker\/dealer,” said TrustFirst President Donald Taylor. Last year 10 percent of the company’s revenue came from private equity placement. This year it could amount to 50 percent of revenue, Taylor said.<\/p>\n
Patrick Martin, owner of the Lanrick Group, said he’s also seen demand for private placement services go up.<\/p>\n
“Probably where I was seeing two to three (proposals) a week, (it’s now) probably four to five,” he said.<\/p>\n
The Lanrick Group typically takes just one deal at a time and is now trying to raise $10 million for Knoxville-based Atmospheric Glow Technologies. Of the 100 funding proposals TrustFirst receives each year, the firm also usually accepts just one, Culver said.<\/p>\n
Martin said in today’s economy it’s tough to raise money even when you’re that conservative.<\/p>\n
“I started in this financial planning business in 1974,” Martin said. “I’ve never seen it this tight before.”<\/p>\n
Culver agreed.<\/p>\n
“The market that we’re in, our investors are somewhat limited,” he said. “We have to go to the outside a lot and try to get other investors to come in.”<\/p>\n
New guys in town<\/p>\n
That’s the approach Wells Grey Capital and C&J Capital Advisors have taken when it comes to finding financing for local companies.<\/p>\n
It might seem a curious time to get into the investment banking business, but Walt Williams, co-founder and managing principal of Wells Grey Capital, said he believes his company is accessing an untapped opportunity by raising outside funds for local businesses.<\/p>\n
“I thought that the lack of investment banking services available to local entrepreneurs was a significant opportunity that we were singularly skilled to fulfill,” he said.<\/p>\n
In addition, Williams said, “we devised a business model that does not depend on our ability to raise money locally for our clients’ projects.”<\/p>\n
John Atkins, who launched C&J Capital Advisors, said he hopes to fill a fund-raising niche for small- and medium-sized local companies.<\/p>\n
A “real dichotomy” exists in the local financial arena, he said. Large national banks sweep into town to snatch up the big deals, taking companies like CTI Molecular Imaging and Regal Cinemas public. Other programs, such as Technology 2020, support tiny start- up companies.<\/p>\n
“We’re filling in the middle,” he said.<\/p>\n
The new players have different approaches.<\/p>\n
Wells Grey Capital uses partner Wells Grey Financial Group’s database of about 32,000 accredited investors — venture capital firms, individual investors, private equity funds and investment banks — to shop deals.<\/p>\n
Williams said his firm helps screen companies and match them with potential investors, who then contact the firms to pursue a final financing arrangement.<\/p>\n
“I kind of feel like a marriage broker sometimes,” Williams said.<\/p>\n
The firm focuses on deals worth between $1 million and $25 million. Williams and partner John Smolik are now working with 24 companies, seven of them local, to raise a total of $134.5 million in capital.<\/p>\n
Many of the local companies are technology-based, although Williams won’t name them due to confidentiality agreements.<\/p>\n
C&J Capital Partners is taking a different approach, shopping its clients to about 1,700 private equity groups across the country that invest in a variety of industries.<\/p>\n
Managing Director John Atkins said six clients – he won’t name names – have signed on for Coulter & Justus’s new service and he hopes to raise nearly $20 million.<\/p>\n
Building businesses<\/p>\n
Using an investment bank to raise capital helps companies in a couple of ways, said local managers.<\/p>\n
First, brokers have contact with investors. They also help businesses become more attractive to investors by providing advice and business planning services.<\/p>\n
In the Knoxville area, said Williams, “people are very creative and hard-working, but knowing how to write an investment proposal, how to assemble the appropriate management team, how to avoid the pitfalls of raising money – the vast majority of people from this part of the country don’t have this set of experiences.”<\/p>\n
Coulter & Justus’s business and accounting experience makes its new financial services a good fit, Atkins said.<\/p>\n
While Atkins helps the companies seek financing, he’ll use Coulter & Justus’s other areas of expertise to help businesses value their companies, make their books presentable and otherwise craft businesses to appeal to potential investors.<\/p>\n
A big part of landing financing of any kind, is “how an investor is approached and how credibility is developed,” he said.<\/p>\n
Whether these new investment services can bring a store of new dollars into the region remains to be seen.<\/p>\n
Williams said he believes there are plenty of local opportunities and that he’s gotten interest from the outside in local projects.<\/p>\n
But, he said, “I think there’s a limit to how much outside money you can bring in without it at least being matched by the local business community.”<\/p>\n
Business writer Larisa Brass may be reached at 865-342-6318.<\/p>\n
TYPES OF FINANCING<\/p>\n
Personal savings, family and friends: Typically the first stage of financing – a few thousand dollars to get the company up and running.<\/p>\n
Venture capital funds: Investment money available through funds – invested in by individuals, corporations, banks and foundations – that typically seek investments in early-stage companies. The investment usually is traded for equity in a company along with other involvement by the fund and its investors, such as seats on the board or a place on the management team.<\/p>\n
Private placement: Funding rounds arranged with accredited investors only, individuals with a net worth of $1 million or more, an individual income above $200,000 or a household income of more than $300,000. Funding is exchanged for debt or equity in the company.<\/p>\n
Private equity or private capital funds: Funds made up of a variety of investors typically seeking more mature business investments in companies beyond the seed and early rounds of financing with a solid corner on the market and significant revenues. Private capital funds also tend to ask for less of a control stake in the company than a venture fund.<\/p>\n
Bank loans: Financing usually requiring significant collateral or cash flow.<\/p>\n
Initial public offering: Sale of shares of a company through public stock markets.<\/p>\n","protected":false},"excerpt":{"rendered":"
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