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Growth companies seeking investment capital should turn their attention overseas, according to Joe Huard, a founding principal with investment banking and brokerage firm Shamrock Partners Ltd. in Media, Pennsylvania. "Investors in Europe and Asia are anxious to cash in on American companies," says Huard. There are several reasons for this, some financial, some strategic.
First, Huard says, while in the United States everybody and his brother has a business plan and a deal, it's not the same in many foreign countries. "There simply isn't the same volume of investment opportunities in many foreign countries," he explains.
Not that there's a total dearth of opportunities. The many bourses and stock exchanges around the globe traffic in established multibillion-dollar enterprises that most North Americans have never even heard of. But these are established companies. To find exciting young companies, ones with new technologies or products that can open vast markets virtually overnight, foreign investors have to hunt further afield. "And their hunting frequently brings them to U.S. shores," says Huard.
But there's another, strategic factor that can bring foreign investments rushing in, according to Huard: licensing and joint venture opportunities. "Many foreign investors want the opportunity to capitalize on new technology, products and business concepts in their immediate [vicinity]," he says. "One way for them to do this is to make an investment in a U.S. company, with licensing rights in their territory as part of the deal." Promoting this concept gives fledgling companies an edge when seeking foreign investors.
A Case In Point
Consider Larry E. Fondren, founder and CEO of InterVest Financial Services Inc. in Berwyn, Pennsylvania, and a client of Huard's. After years of operating proprietary computer networks so insurance companies could exchange blocks of business between themselves, Fondren turned his attention to the bond market.
Little known to many businesspeople, even intelligent and well-informed ones, the trading market for most corporate and municipal bonds has not kept pace with the technological developments that have driven equity trading. "Rather than leading-edge technology, bond [traders] rely on the simple technology of phones and faxes," says Fondren.
In fact, he says, for most bonds, there is very little centralized trading information that lets investors understand trading history, recent prices and bids from other buyers--all of which are standard for even the humblest of equities trading on the Bulletin Board, the lowest rung of the Nasdaq stock market. As a result, the bond market can be terribly inefficient, with hidden costs that can seriously cut into the profits of bond investors.
Enter Fondren's InterVest, which has developed an electronic exchange for fixed-income securities (i.e., bonds) through which institutional investors, brokers and dealers could trade directly with each other without third-party intermediation. (Fondren is quick to point out that, for many reasons, while his system looks like an exchange, acts like an exchange and is even regulated like one, it is not an exchange, as defined by the Securities and Exchange Act of 1934.) The system was officially launched in December.
Of course, developing a system like this takes capital, and plenty of it. After plowing in $3.5 million of his own money, plus another $1.5 million borrowed from friends, family and credit cards, Fondren went looking for more. Working with Huard, Fondren quickly closed a deal with his first outside investor, British merchant banking and trading firm Dawnay, Day & Co.
Though merchant bankers are always looking for investments, the InterVest deal demonstrates the synergies that can occur between U.S. firms and their counterparts overseas. According to Fondren, Dawnay, Day, which is based in London and trades government bonds throughout Europe, invested "not only to get a return but also to get the ability to license and import technology that would give them a competitive edge in their marketplace." Indeed, the InterVest technology was just the kind of system Dawnay, Day would soon find itself competing against, so having it in the company's arsenal was a powerful strategic advantage.
Naturally, Fondren wanted capital, but he also wanted something more. "Our business has global potential," he says. "But trading bonds in the United States is tricky enough. To take our system into, say, Europe, we needed a local partner that knew the subtleties, conventions and regulations in the many different markets there."
In fact, so committed were both parties to the joint venture opportunities that the final deal resulted in two investments. Dawnay, Day invested in InterVest, the U.S. company, but also in InterVest Ltd., a new, jointly owned company that was formed to deliver bond trading services to the European community.
Charting A Road Map
According to Huard, interest in American companies is highest in the United Kingdom, Germany and the advanced economies of the Pacific Rim, such as Japan and Malaysia. "These countries have many large businesses that are well-established and forward-looking," says Huard, "but they do not necessarily have the infrastructure to support the growing [entrepreneurial] companies that are so commonplace [in the United States]."
Moreover, Huard adds that in many of these countries, consensus and the status quo rule, not the inventor or engineer with unconventional ideas that lead to new products and services. Accordingly, he says, it's unlikely a surge in entrepreneurship will occur any time soon to detract from the interest in American entrepreneurial companies.
What do you need to raise capital overseas? Key requirements, says Huard, are products or services that are universal in appeal but for which, at least initially, there is a specific target or clientele. For instance, while InterVest has the potential to affect every investor on the face of the earth, Fondren was able to communicate to Huard highly specific organizations that would be able to use the technology--namely, bond trading organizations throughout continental Europe.
Huard counsels entrepreneurs to avoid the temptation of trying to locate and close a deal with overseas investors yourself. "Time and expense aside--both of which are significant--if you don't know your way around," he cautions, "you could find yourself closing doors that would otherwise be open to you had they been approached correctly."
Fondren is even more emphatic on this point, saying, in effect, don't try this at home without the assistance of a qualified professional. "It's still a wild world out there," he says. "Without a professional who knows the ropes, you could quickly find yourself lost and in trouble."
InterVest Financial Services Inc., 200 Berwyn Park, #111, Berwyn, PA 19312, (800) 682-2749, (610) 647-9500;
Shamrock Partners Ltd., 111 Veterans Sq., Media, PA 19063, (610) 566-4900.