Need Money? There Are Choices | Financiers still want sound business indicators before they'll invest, say Central Mass. officials
Where’s a business supposed to get money nowadays?
Commercial lending from banks, according to some business owners, is more difficult to get than it has been in years past. The initial public offering (IPO) market of private companies came to a near-standstill in the second half of this year. And venture capital (VC) financing, by many estimations, is an investors’ market — meaning there are many businesses looking for funds, allowing investors to be increasingly selective about which companies get money.
But there are opportunities for businesses. Local executives and bankers agree that financiers are still looking for sound fundamental business indicators before they pour money into companies.
Back To The Basics
“We know that every loan request isn’t perfect,” said Mike Crawford, chief operating officer for Worcester-based Commerce Bank.
Despite it being a tough economy, Crawford said Commerce’s loan portfolio has grown about 15 percent in each of the past few years.
“Our lending window wasn’t closed for one day,” he said.
To get a traditional business loan done for a company, he said, bankers focus on the basics, sometimes referred to in the industry as the “five Cs:” character of the business, condition of the market, capacity of the business to take on debt, capital the company currently has and collateral the company can use to take out a loan.
“In the end, that’s what you’re taught in business school and it holds true today,” he said.
But traditional business loans are not right for every company. Many high-technology business executives look toward venture capital fundraising to fuel their companies.
Venture capital investing seems to be holding its own. In the third quarter of the year, there were 765 VC deals nationwide, with investors pouring $8.4 billion into businesses, according to VC tracking firm Dow Jones Venturesource. That’s an increase of 29 percent in the amount of money invested in businesses compared to last year.
One of those businesses getting a VC deal was Natick-based cloud computing company TwinStrata. The company secured an $8-million Series B financing round in October, said company CEO Nicos Vekiarides.
“For us, we already have an infrastructure and investors in place,” he said, noting that the company had an initial Series A fundraising round in 2009.
There was an expectation from current investors that to truly scale up the company, more money would be needed, so additional investing dollars were acquired. The company offers a range of IT products that allow businesses to more effectively manager their data storage on the cloud — a term for off-site IT infrastructure.
TwinStrata already has more than 150 licensed installations and about 30 employees. And, with the new funding, Vekiarides plans to scale up the sales, marketing and outreach.
“Our goal is to get the word out and close as many deals as possible,” he said.
Vekiarides said if he had started TwinStrata a decade ago, the start-up market would have been completely different. At that time, there were more venture capital deals and fewer companies looking for funding, meaning that VC funding was comparatively easier to get, he believes.
Today, Vekiarides said VC firms are looking for companies that already have a product and customers in an effort to reduce investors’ risk.
To help companies reach that point, new players have played increasingly important roles in helping to finance businesses.
To help get to a point where VC investors will pay attention, businesses are relying more today on early-stage, high-risk, high-reward investors known as angel investors. Typically, angel investors provide less money than a venture capital firm does, and traditionally angel investors use their own personal wealth to invest in companies, compared to VC firms that use pensions or other investment vehicles as capital to dole out as VC funding.
Angels tend to invest in companies that aren’t quite ready for VC financing, said Jerry Schaufeld, a professor at WPI’s schools of business and engineering, and an angel investor himself.
Schaufeld said there are 32 angel investment groups in New England and they’re increasingly providing the upfront capital businesses need to prepare a business for a venture capital investment. TwinStrata even started out with an angel investment, Vekiarides said.
Once a company is funded, eventually those investors look for an exit strategy. Unfortunately, those do not seem to be doing very well right now. One of the most traditional exits for investors, meaning the way investors recoup the money they have poured into a business, is an IPO.
“The U.S. IPO took a pretty big hit in the third quarter,” said Stephanie Chang, a research analyst with Renaissance Capital, an IPO investment firm based in Greenwich, Conn. “The aftermath of the European debt crisis, combined with a weak U.S. market, decreases the risk appetite for investors.”
There were 18 IPO deals in the U.S., down from 33 in the same quarter last year, a drop of almost half.
“Pretty much after July, the IPO market completely shut off,” she said. “Not many people wanted to approach the public markets.”
Perhaps things are starting to look up. So far in the fourth quarter, there have already been 18 IPOs, the same number as there were in the entire third quarter. And there could be more on the way. Yelp, the online search company, has announced an IPO and rumors continue to swirl that Facebook, the social media behemoth, could go public, Chang said.
IPOs are like dominos, Chang said. If there are a handful of successful ones in the market, more businesses and investors start jumping in. If some of these big-name companies execute successful IPOs, that could bode well for other businesses across the country that are looking to go public.
WBJ Web Partners
Most Recent
Most Recent
0 Comments