YOUR TWO YEAR-OLD JUICE COMPANY IS STARVING FOR new computers and factory machinery, but you have no cash reserves. And not much hope. Mother Nature has wiped out your supply of oranges from Texas and Florida. The stock market's just crashed, so forget that IPO. And by the way, one of your distributors has gone belly-up, leaving you with an IOU for $19,000. It's either get cash or go under. Where do you turn?
That's the question Grant Peck and Mike Delaney faced. The Denver entrepreneurs were determined to grow out of the crisis. They took their firm, Just Squeezed Juices, through a 504-D private placement -- a private stock sale referenced by its SEC regulation code. The partners peddled 10 percent of their company and raised $130,000 from 42 investors in four months.
Today, just Squeezed Juices is the largest supplier of fresh juice outside Florida and California and projects revenues of $5.4 million in 1995.
Every business owner has to be a master at raising capital. The resources are out there; more than $4 billion in venture capital money was invested last year -- even more than during the entire 1980s. According to Larry Winters of Dun & Bradstreet's Small Business Services, banks are becoming more aggressive about working with entrepreneurial businesses. And there are opportunities in venture leasing, factoring, private placements, or barter deals. But you've got to be better than the next person to get your share.
BOUNTY FROM BOOTSTRAPPING
T.J. Buckner, Terri Collymore, and Gretchen Sawyer dreamed of developing a line of aromatherapy products -- all-natural, sweet-smelling shampoos, creams, and lotions to comfort the body and lift the spirits. With only $1,500 in personal savings, they founded MUSE Body, Mind, Spirit Inc.
Idea rich but cash poor, they approached several corporate backers and learned that startup capital came at a price. The companies wanted to buy the concept and hire them as managers.
Why should they work for a stranger and relinquish the rewards of their idea? Instead, the partners began bootstrapping, a strategy to extend the resources at hand. Its techniques can include:
* Negotiating extended credit terms from suppliers.
* Receiving advance payments from customers.
* Exchanging equity stakes for outside services and supplies.
Sawyer, a former executive with Giorgio of Beverly Hills, used her contacts in packaging and manufacturing to hire low-cost manufacturers and developers. Each agreed to be paid after sales started rolling in. "People don't realize how much support they can get from their own suppliers," says Jim Drayton, a money broker with Corporate Capital Funding Inc. in Owings Mills, Md.
MUSE asked its retail accounts -- fashion boutiques, health food stores, and gift shops -- to pay in advance or C.O.D. "We explained that we're small and can't wait for payment," says Buckner. "It doesn't always work, but if you don't ask for prompt payment, you definitely won't get it."
They persuaded department stores, which normally pay suppliers in 90 days or later, to settle invoices in 30 days. MUSE got credit from a supplier by showing him a large purchase order from a department store, evidence of its need for product and its ability to pay. This year, the Beverly Hills company will sell $200,000 worth of product, not bad for its inaugural year in sales.
Bootstrapping works for established companies as well as start-ups. When Ernst & Young surveyed members of its Entrepreneur of the Year Institute earlier this year, 66 percent indicated that they planned to finance themselves internally for 1995, up from 61 percent in 1994.
USE YOUR RESOURCES
In the late 1980s, Grant Peck charged $74,000 on 23 credit cards to get Just Squeezed Juices up and running. "People say, `Never deal with credit cards because the interest rates are too high,'" Peck says. "But being unable to collateralize a bank loan, what was my alternative?"
Sometimes back-pocket financing is the only alternative for new businesses. Now, as interest rates drop to 8 percent and 9 percent, it's more advantageous than it was just a few years ago. Of the 750 small and medium-size companies surveyed this year by the Arthur Andersen Enterprise Group and National Small Business United, 26 percent used credit cards to fund their companies. That's up from 16 percent in 1993. But there can be restrictions. Some states require credit card issuers to specify that personal cards be used only for personal expenses.
Private placements work when companies are not ready or able to go public. Though exempt from the extensive registration statement that the SEC requires for an IPO, private placements are no stroll through the park.
Federal regulations restrict such placements, placing limits on how much you can raise and from whom. For example, offerings made under Reglulation D, Rule 505, can raise up to $5 million in a 12-month period from any number of investors, and up to 35 of those investors can be nonaccredited. Offerings made through 504-D can raise only $1 million, although there's no requirement for having accredited investor's.
When looking for investors, you want individuals who understand your business. Besides business acquaintances, consider suppliers, customers, and people with an affinity for your field.
John C. Neubauer's firm, Blueberry Plastic Mill Corp., breaks down plastic into resins and remolds it into cost-competitive items such as flowerpots and gardening cans. He canvassed for public and private investors already knowledgeable about plastic recycling and raised $1.15 million in the first stage of financing.
Neubauer first approached the city of Des Moines, which needed to reduce the burden on its landfills. Next, he went after an environment-conscious local business, Anderson-Erickson Dairy, which was eager to recycle its ever-growing piles of plastic. Investing in Blueberry enabled the company to reuse its milk jugs.
KNOW THE SCOR
Blueberry Plastic filed a Small Corporate Offering Registration (SCOR) known as a U-7 with the Iowa Department of Insurance, the regulatory body that oversees securities in the state. Neubauer has raised about $600,000 from 75 investors. "For every investor who committed, I probably approached 10 to 20 people," says Neubauer.
SCOR is a form of private placement. It allows a company with less than $25 million in annual revenues to raise up to $5 million. Designed to reduce the cost and paperwork of an IPO, SCORs have been greeted coolly by businesses and states alike. Entrepreneurs complain that they involve too much paperwork and are time-consuming to sell. For instance, SCORs demand that you file in each state where you plan to sell stock.
The regulation was supposed to create a do-it-yourself operation, but most companies must hire a broker to sell stock. In Arizona, nearly 30 companies have started the filing process, but only 3 have sold to their minimum.
"I raised $600,000, and it probably cost me 10,000 -- less than 10 percent is pretty good," says Neubauer. But, he adds, if he were to do it over again, he's not sure he'd use SCOR because of the time involved.
CREATE AN AUDIENCE
At the Gold Coast Venture Capital Club in Boca Raton, Fla., former firefighter John Flaherty stands in front of a packed crowd of private investors, investment bankers, and venture capitalists. His mind flashes back to the day that changed his life. He had watched helplessly as a tow truck pulled a submerged tractor-trailer from the canal. Inside lay a family of four, drowned. Flaherty and his fire company could not get them out in time.
From that moment on, Flaherty invested every, thing he had to develop the Excalibur Knife for Life. Powered by a firefighter's oxygen tank, it cuts through metal on land or in water at the rate of 22,000 strokes a minute.
Flaherty demonstrates his product for the audience by screening a video of the Excalibur in action. A panel of investors who'd previewed his business plan before the meeting proceeds to pick him apart: "Have you allotted enough for your marketing budget?" "Are you being too optimistic about first-year sales?"
After an hour of questioning, Flaherty wipes his brow, steps down from the podium, and...