Start with a Bank Loan?

IPOs: Bust or Boom?


Roll-Ups: Hot Idea

Corrections or additions?

Capital Conference: Money for High-Tech

These articles by Peter J. Mladineo and Barbara Fox were published

in U.S. 1 Newspaper on February 11, 1998. All rights reserved.

The money is out there, and high tech firms are


to get it. But rapid changes are taking place in how these companies

get financed. Investors are setting records (they’re offering more

money) and so are companies (they’re growing and going public more


New Jersey is right in the middle of this volatile market. In a survey

published by Business Facilities magazine, the state ranked fourth

in the nation in terms of high tech companies (6,881), and it paid

the second highest average high tech salary ($55,970). New Jersey

is also getting at least its share of venture capital money. For


Therics at Campus Drive received $4,752,000 last year for its 3-D

production process for medical products, and Sys-Tech Solutions on

Eastpark Boulevard had a $4,976,000 venture capital investment for

its packaging automation software.

So it’s not surprising that this year’s New Jersey Capital Conference

at the Princeton Marriott is attracting lots of interest. Sponsored

by the New Jersey Technology Council on College Road and set for


February 19, from 8:15 a.m. to 2 p.m., the conference has a capacity

of 300 people, and it may be oversubscribed by next week.

Mike Nelson, executive vice president of PNC Bank, explains

just why funding for high tech is such a hot topic. "Venture


firms have set records, in the last three years, for funding high

tech companies," says Nelson, who will give the luncheon speech

at the conference.

Returns have also been at record levels because companies are going

public in less time. Some make it from the start-up stage to the


public offering in under four years, a rate that is phenomenally fast.

"With historically very high rates of return, money is chasing

after these deals," says Nelson.

Just as the pool of capital has grown, so the number of these


being financed is also growing at a rapid clip. "On the supply

side, for lots of categories of companies, going into business is

easy," reminds Nelson. "You don’t have to buy a production

facility — you merely have to sell a piece of intellectual


The demand for capital is increasing, and the supply is growing. It’s

hot. "With things going on at once, you have an unprecedented

level of activity," says Nelson. "I am seeing that all over

the region."

Here’s the lineup for the New Jersey Capital Conference:

John Martinson of Edison Venture Fund gives the welcome and

keynote address at 8:15 a.m., followed by side-by-side workshops.

At 8:30 a.m.: "Private Equity Sources for Intermediate Stage


with Jim Gunton of Edison Venture Fund,

Dick Robbins f

Arthur Andersen, Gerard DiFiore

of Reed Smith Shaw McClay, and

Geoffrey Stengel of BT Alex Brown. Also at that time, "State

and Federal Backed Financing," with Caren Franzini of the

New Jersey Economic Development Authority, Jay Brandinger of

the New Jersey Commission on Science & Technology, Jim Millar of

Early Stage Enterprises, and Don Christianson, of the Small

Business Administration.

"Growing Your Company through Mergers, Acquisitions, and


at 9:30 a.m. features Tim Scott

of Price Waterhouse and James

Roberts of PNC Bank. "Debt Capital Sources & Solutions,"

also at 9:30, has Nat Prentice of BT/Alex Brown,



of Funds for Business + Leasing, Arthur Birenbaum of Jefferson

Bank, and June C. George of BT Alex Brown.

At 10:45 a.m.: "How to Finance Roll-Ups," Brian Hughes

of Arthur Andersen and

Jim Hunter of Janney Montgomery Scott,

or "Joint Ventures/Strategic Partnering" with Bill Thomas

of Buchanan Ingersoll and Steve Socolof

of Lucent


David Sorin

of Buchanan Ingersoll and David Proctor of

Janney Montgomery Scott present the outlook for IPOs at 11:45 a.m.,

followed by lunch with Nelson as the featured speaker. Following the

lunch, at 2 p.m., CFOs and financial executives will have their own

roundtable on the IPO experience.

For registration information ($150 at the door) call the New Jersey

Technology Council at 609-452-1010. Interviews with Jim Gunton, Gerard

DiFiore, Brian Hughes, David Sorin, and Mike Nelson follow.

Top Of Page
Start with a Bank Loan?

Almost everyone at this conference will be talking about

fancy alternatives to a bank loan, alternatives that have been devised

because banks are supposed to be fiscally conservative when it comes

to high tech financing. Will a banker float a loan to a risky start-up

when the only collateral is a great idea? Until now, not likely.

High tech firms are almost never profitable when they are young,


Mike Nelson of PNC Bank, "and they have an extraordinary

growth rate ahead of them. That will place unusual demands on them

for capital, and they won’t be able to fund themselves through cash


That’s why only a handful of banks nationwide — Silicon Valley

Bank and Imperial Bank on the west coast and Fleet Bank in the


— boast a lending group specifically organized to lend to high

technology and emerging growth companies. PNC has joined this limited


Nelson gives the luncheon speech at the New Jersey Capital Conference

on Thursday, February 19, at the Marriott, and he will tell how and

why the market has changed.

"Our unit was formed at the demand of our chairman to address

the needs of high technology and emerging growth companies," says

Nelson. The son of an chemist who worked for NASA, he majored in


and economics at the University of Pittsburgh, Class of 1979, and

stayed for his finance MBA.

Based in Pittsburgh, Nelson is now executive vice president and has

seven people on the staff of his unit. "The bank has made a


commitment to this business," says Nelson. "Most of the


on my staff have technical backgrounds." In less than a year the

unit has made "relationships" or loans to two dozen firms.

"We need to assess the future success of the company rather than

what it has done in the past," says Nelson. "We spend a lot

of time determining what is unique about the company, what might


some value in the future, on the appropriateness of the management

team and whether it can execute. We spend time on understanding the

other parties supporting the company; we view professional venture

capital firms as being very helpful. Having the right accounting firm

and legal counsel and board of directors at an early stage can be

very helpful in executing a strategy."

Nelson’s PNC lenders assess risk very much the same way that venture

capitalists do. But when venture capitalists invest they get equity,

in contrast to a bank making a loan. The bank expects to be paid back

in cash. If the investment is successful the venture capital firm

is going to make a considerably higher profit than the bank, but the

bank has taken fewer risks.

How does Nelson try to risk-proof his loans? "We tend to structure

our transactions so we are the only senior lender," says Nelson.

In other words, PNC Bank would always be in line to get its money

first. Also, the total amount of PNC’s loan should be smaller than

the total of everyone else’s investments or loans. "That is a

little safer from our point of view," says Nelson.

Also — unlike the venture capitalist — the bank does not


hands-on supervision of the young firm. "We stay involved with

our clients. We consider the active involvement of a venture


to be our surrogate. We have several close relationships with venture

capitalists in the region and nationally."

PNC has a new kind of start up loan available to companies on the

heels of their first major venture capital financing. "It is a

very simple, very flexible loan, directly from the bank, not


with SBA," says Nelson. A typical first round of venture capital

financing would be in the $1 to $2.5 million range, and PNC might

add about $1/2 million on top of that. This loan could be used for

general working capital and would be secured by whatever assets the

company has.

More traditional loans for later stage companies would be for working

capital (against receivables), for equipment (against the equipment

value), and for real estate. "If there is something we are seeing

the most of these days it is Internet based companies," says


"Electronic commerce is a specific part of the market we


well. We’ve also done companies in semiconductors and medical


Prospective borrowers can contact Virginia Alling, or a new

PNC hire Greg Cote, or a biomedical specialist James


They’ll all be there on the 19th. A representative from Friedman


& Ramsey, PNC’s IPO equity underwriter, will also attend.

The bank loans that Nelson discusses are for companies with a first

round of venture capital funds and that are moving quickly to an IPO.

Nelson has an optimistic view of the IPO market: "The very buoyant

IPO market has accepted companies at earlier stages in their


than before at very high values. Companies are going from startup

to IPO in just under four years. With historically very high rates

of return, money is chasing after these deals."

— Barbara Fox

Top Of Page
IPOs: Bust or Boom?

From one angle, the initial public offerings market

is turning into a high stakes whirlwind of technology firms, quick

millionaires, and inflated stock prices. But from another point of

view, it’s not quite what it was just last year. In the opening month

of 1998, reports David Sorin, the managing partner of the


office of Buchanan Ingersoll, he has seen only a fraction of the deals

done at this time last year. Sorin is less sanguine than Nelson about

the IPO picture.

"The first five weeks of 1998 have been relatively slow when it

comes to IPOs," he says. In all of January only 15 deals


amounting to a total of about $750 million. "In comparison to

recent history, that is low but when you look at it over a longer

term, raising $750 or $800 million a month in the IPO market is hardly

something to sneeze at."

He and David Proctor, an investment banker with Janney


Scott, give an "Outlook on IPOs" at the Capital Conference

on Thursday, February 19, beginning at 11:45 a.m.

"We’re going to do things a little differently than in the last

couple of years, when most of the talk was about profit," Sorin

predicts. "We’re going to talk about the current state of the

IPO marketplace, about some of the benefits and advantages of going

public, and about some of the burdens and challenges of being a


held company and some of the processes."

Some skeptics have gone on record preaching doom about technology

firms after watching the air explode out of Netscape’s stock last

year. But Sorin challenges them. "I’m not sure that the Netscape

experience is all that relevant," he says. "I think the lesson

is that high tech companies in general are in markets that involve

great volatility and intense competition. The people who play in the

technology arena understand that."

For investors in technology, Sorin has this advice: "Look for

uniqueness in the technology that the company produces and whether

or not that technology’s been adequately protected. You need to look

at the size of the market that the company’s playing in. It’s really

important to look at the management team that’s been developed. The

R&D effort and time to market — those are all real serious issues.

And of course, the competitive landscape."

One contributing factor to the uncertainty is that after the record

IPO years of 1996 and 1997 there could be an unconscious feeling that

the other shoe could drop on the market at any time. Couple that with

recent world crises (in Asia, Iraq, and the White House, to name a

few) and there’s plenty of reasons to believe that the IPO market

— and any financial market — might be in for a harder time

this year than last.

There has also been a rise in the numbers of mergers and acquisitions

as well as other alternative strategies to growing a company. One

example: Last week’s purchase of Princeton Softech by Computer


of Mountain Lakes. "Increasingly, companies are doing strategic

partnering arrangements and sale of the company as an alternative

to going public," says Sorin. "I believe that if you actually

looked at relative valuations you would find that going public results

in a higher public valuation. But there are some companies that don’t

open the kimono in the way that you have to in order to go


Sorin refers to the disclosure required by the Securities and Exchange

Commission, which can dissuade many companies from going public. To

Sorin, this kind of reluctance is tantamount to paranoia. "I think

most people tend to overstate the anti-competitive nature of making

the disclosure," he says. Prospectuses, moreover, "make very

interesting reading but also involve not only the good things about

a company but all of its wars."

— Peter J. Mladineo

Top Of Page


<B>Gerard DiFiore sounds a bit like Forrest


when asked about structuring financing deals for expansion stage


"Think of it like Baskin Robbins — there are different


he says. "You can have a redeemable preferred, or a convertible

preferred that’s not redeemable. With either of those you can have

detached warrants, or no warrants. Those are like sprinkles."

Sweets aside, an expansion stage company is often synonymous with

an intermediate stage company. This is the subject of a panel at the

New Jersey Capital Conference with DiFiore, an attorney with Reed

Smith Shaw & McClay, Jim Gunton of Edison Venture Fund,


Robbins of Arthur Andersen and Geoffrey Stengel, of BT Alex

Brown. The fun starts at 8:30 a.m. Call 609-452-1010 to see if there’s

a seat left.

DiFiore, whose career has included four years with the federal


and Exchange Commission, describes the intermediate stage company

as a firm "with stable revenues, with a product that’s been


in the marketplace," and that is approaching profitability or

already profitable.

As far as raising cash goes, intermediate stage deals are often


to initial public offerings. "For a company that’s likely to do

a significant IPO, they can’t get to that point without something

like this in between," says DiFiore. "They need more equity.

There could be companies that go public at this stage but it would

be poorly planned because they give up too much of their equity."

Like the IPO, the intermediate stage deal is mega-complicated, and

DiFiore urges management to stick close to legal and financial


"There could be unfortunate surprises for the company that’s not

paying attention," he says. "Surprise is good for no one."

Contracts often contain many different tethers between management

and investors and, if not understood, they may give management the

impression that they are being squelched, or as DiFiore coins it,

"put into the box."

"Basically management gets put into the box so there’s a


line of communication between management and the investor," he

explains. "It’s to keep the investor involved in the affairs of

the company. Frankly, in the worst case, if the company wanted to

do something that was stupid it would prevent the company from doing

it. Maybe investors have built the company on sweat equity but


have put hard money into that."

DiFiore isn’t suggesting that once a company accepts intermediate

stage financing it is abdicating the helm. On the contrary, a good

investor will want to keep the same management in place and has most

likely based all or at least part of the decision to finance a company

on the strength of its management.

Gunton classifies intermediate stage companies as between $1 and $15

million in revenues, with a product or service that’s already been

accepted on the market. They also have customers "that have tried

and validated the product" and have "multiple distribution

channels, either indirect or direct."

"The third characteristic would be a track record of growth,


more on the revenue side," says Gunton. Earnings may still be


Gunton, 32, has a degree from Stanford University (Class of 1988)

and worked at Oracle and as a consultant for Big Six accounting firms

before becoming a principal at Edison.

As a financier, Edison Venture Fund usually comes in at earlier stages

than senior investment firms like BT Alex Brown, but, says Gunton,

there is a world of difference between his deals and what would be

considered early stage investments. "Early stage companies are

the ones that get the most attention, because they’re the ones that

have an attractive concept," he says, "whereas the expansion

stage companies are the ones that have gone to the next step."

Companies of the midway also have a much easier time getting other

types of financing, Gunton reports. When a company has $1 million

in revenues, it is often too small to qualify for things like bank

financing, but when it approaches the $15 million mark it starts to

qualify for things like debt financing, he explains.

Expansions can also be accomplished without financial help.


always the alternative of not raising capital," says Gunton.


can just grow at a slower rate. You become somebody that could be

acquired by somebody else."

Other alternatives include venture capital or acquiring corporate

partners without losing control of the company. "IBM might provide

some amount of capital for a small amount of equity," he says.

"It might fund a project that is strategic to them."

Like a growing segment of sources from all over the financial world,

Edison Venture Fund has a penchant for the technology sector. "The

overall theme is applying technology to automate old ways of


says Gunton. What criteria does he look for? "The opportunity

for rapid growth, for market leadership, for defensible proprietary

technology, then for experience in terms of the management —


success in their area."

Edison usually invests $1 to $5 million to purchase a minority


position and joins the board as a partner. Edison also likes to


customers and new distributors and corporate partners and also help

with the financing side," says Gunton.

In the past, EVF has helped to fund a few Princeton area companies,

including Princeton Financial Systems and Signius Corp. (formerly

ProCommunications), which recently moved from 345 Witherspoon Street

to 11,000 square feet in Somerset.

Good news for New Jersey companies is that Edison Venture Fund has

received state funding that will enable it to invest in more New


companies. This, Gunton suggests, could easily translate into


opportunities for the pharmaceutical and telecom sectors. "I think

that the geographical proximity to these customers helps give us a

leg up but it also spawns new companies that roll out of these


he says. "The third point is you have talent coming out of these

industries that can join or strengthen these companies that are



— Peter J. Mladineo

Top Of Page
Roll-Ups: Hot Idea

You may be in an industry that is ripe for


says Brian Hughes. If your industry is fragmented, some big

firm can come along and consolidate the industry with a


the latest twist in entrepreneurial financing.

"Roll-ups are a way for entrepreneurs to create large companies

in obscure industries previously dominated by mom and pop


says Hughes, a Wharton MBA who has worked at Arthur Andersen for 17

years and been a partner for five. He and Jim Hunter, of Janney

Montgomery Scott, will give a workshop on "How to Finance


for the New Jersey Capital Conference on Thursday, February 19, at

10:45 a.m. The cost is $150; call the New Jersey Technology Council

at 609-452-1010 to preregister. A roll-up consolidates many small

firms into a new public entity, and it may occur with (or before)

an initial public offering. The concept is only three years old, but

one of the leading examples is in our own back yard —


now known as Signius, the nation’s largest provider of inbound



Founded by Barbara Robertshaw (a Brown alumnna and former investment

banker) and William Robertshaw (her father), it had an early


from the Edison Venture Fund. In April, 1997, the firm bought out

its largest competitor and quadrupled its space with a move from


Street to Somerset. It is well on its way to an IPO.

Hughes cites two different types of roll-ups. "One we call Poof!

Overnight you are created, and the companies come together as an


The second kind is more of a slow bake type. Someone buys companies,

integrates them, often with funding by venture capitalists, and then

goes public. Procommunications was of the second kind. Some of the

first roll-ups consolidated firms in the office products area:


Express (in 1994) and U.S. Office Products. U.S. Physicians is an

aggregation of 37 physician practices to deal with third party payers

more effectively. It has filed SEC registration and hopes to be public

by March.

Another well-known roll-up was in the auto business, Republic


for which Wayne Huizenga continues to buy dealerships. A Chicago


capital firm, Golder Thoma, has financed more than 45 consolidations,

including a temporary staffing concern, funeral homes, pharmacies,

and security guard services. A Houston-based firm, Consolidated


has created a blind pool of $600 million to finance roll-ups. Here’s

how to tell if you should start rolling up your industry:

Is it fragmented? Dominated by small players?

Are there efficiencies to be gained if you consolidate,

not only by increasing the revenues but decreasing costs.

Arthur Andersen almost always has the buyer as a client.


once have we been on the side of the company that got acquired,"

says Hughes. But he takes a dim view of your being the top dog unless

you are very smart and have very deep pockets. "We would probably

tell people to go with Republic than fight Huizenga," says Hughes.

"Consolidations are very expensive. A lot of fees are


— Barbara Fox

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