Dollars and Sense
The last time we checked on Larry Morton and Don Duke of Indianapolis-based Micro-Link Technologies Inc. ("Raising Money," July 1995), they were in the throes of raising money from banks and equity investors.
The good news: Micro-Link got a new bank and increased its line of credit. The bad news: The company is still searching for that all-important layer of equity capital.
For Micro-Link, the stakes could not be higher. Working with Hiarc Inc., a software development firm in Orange, California, Micro-Link developed a data storage and management product called StoreMaster. "The amount of data on computer networks is growing at an exponential rate," Duke explains, "and companies need a turnkey storage solution with intelligent software."
But the company went as far as it could with debt. And Micro-Link devoted considerable cash flow from its industrial computer business to product development. Now, with StoreMaster ready to launch, Micro-Link needs equity capital to kick off its sales and marketing efforts.
Micro-Link's trials and travails over the past year demonstrate just how difficult raising capital can be-even when you've got a great deal. In addition to several dangers inherent in doing deals, the degree of difficulty is compounded by the fact that financing sources are not always what they represent themselves to be. In the final analysis, Duke and Morton decided it would be easier to raise the money they needed themselves than to rely on others to do it for them. Below is a brief history of what led them to this decision, as well as some of the lessons they learned along the way.
A Modest Proposal
In January 1995, Duke made a pilgrimage to New York City to meet with several investment banking firms. Of the four meetings, one firm showed particular interest in Micro-Link's storage device. In fact, Duke recalls, this investment banking firm connected the StoreMaster to its own computer network-and promptly fell in love with the product.
But beauty is in the eye of the beholder. "While some of the bankers at this firm thought Micro-Link was ripe for an initial public offering [IPO]," recalls Morton, "there were others there who thought we should merge with one of the other high-tech companies they had taken public earlier." Unfortunately, when the primary advocate of the IPO left the firm, Micro-Link found itself considering a marriage proposal it had never wanted in the first place.
Not to worry: By late spring, another investment banking firm was "hot to trot." So, letting the first suitor wither on the vine-a tactic which, in hindsight, Morton says was a mistake-Micro-Link focused on the new proposal.
This investment banker issued a letter of intent to underwrite 1 million units priced between $5.50 and $6.50 per unit. The units consisted of one share of common stock and one common stock purchase warrant, which would allow the holder to buy an additional share at a predetermined price. In addition, the firm offered to "bridge the deal," meaning they would also underwrite a private placement of $700,000 that would be repaid once the IPO was done. Later on, this amount was increased to $1 million.
Morton recalls the bridge financing was to be completed during October and the IPO was to be done in the first week of December. Morton spent the summer preparing the various offering memorandums.
But when the underwriter got behind schedule, the deal got pushed into November. And when executives from the underwriter visited Micro-Link to discuss the bridge financing, Morton recalls, "They tore apart the offering memorandum so badly, it caused even more delays."
In December, with draft seven of the private placement memorandum in circulation, the underwriter asked Micro-Link management to make a presentation before its "commitment committee."
"We thought this would be a rubber-stamp affair," recalls Morton. But after the meeting, attitudes changed, phone calls to the underwriter went unreturned . . . and, in the end, the plug got pulled on the deal.
Happily, though, in preparation for being a public company, Micro-Link had already begun to stock its board of directors with movers and shakers. So when the second deal went south, Morton and Duke were able to approach one of their prospective new board members, who also happened to command a vast personal fortune. Would he be interested in structuring a deal with the company?
It turned out he would. Then it turned out that the insurance company where he was executive vice president might want to participate as well. Then the deal got structured so that the only investor would be the insurance company. And when, after months of due diligence and negotiations, the vice president of planning at the insurance company told Morton, "Write me a list of everything you need cash for," Morton recalls, "it was one of the happiest days of my life."
But Morton's joy began to fade when the insurance company's MIS manager questioned Micro-Link's strategy for addressing the storage market. Without his backing, the whole deal began to tilt, until finally, it toppled-just two days after the insurer had asked for that list of proposed expenditures.
At this point, almost a year had gone by since Micro-Link started trying to raise money. But while Morton and Duke didn't have any capital to show for their efforts, they had something almost as good. "With all we had been through, with the seven drafts of the private placement memorandum, and with all the investors we had talked to," says Morton, "we had the confidence we could raise the money ourselves."
And so Morton began to structure a new deal-one he felt confident Micro-Link's executives could sell to local investors.
But aside from the evergreen truism "Trust in yourself," exactly what pearls of wisdom did Morton and Duke acquire along the way? Following are five lessons Morton says they learned the hard way at a cost of some $250,000.
1. Offer a clean slate. "We made the mistake of being half-merged with our technology partner at the time we were looking for capital," recalls Morton. Had Micro-Link and Hiarc merged before seeking outside capital, he says, they would have had a much easier go of it.
2. Always keep a fallback position in your hip pocket. If you accept the reality that most deals fall though, Morton says, you'll take better care of the capital sources that show an interest in you, and keep them up to date, even if they are not working on a transaction. "After our second transaction fell through, we couldn't very effectively go back to the first one," he explains, "because we had basically let the relationship go."
3. Be selective about financial advisors. Morton says Micro-Link used several financing consultants. While consultants can be worth their weight in gold if they produce, they're a drag on cash flow when they don't. Morton's advice: Hire one if you must, but don't stick with him or her too long if you don't see results.
4. Explore your local options first. "When we brought on the Hiarc technology," recalls Morton, "we had an incredibly exciting opportunity-but we never presented it to local investors. As we later found out, there was a lot of local support for what we were doing, but we got too caught up in selling the deal in New York to notice."
5. Talk to decision makers. "The so-called 'commitment committee' really caught us off guard," says Morton. "We thought the guy we were talking to all along had the authority to do the deal. Talking to the 'senior vice president of investment banking' sounded pretty good to us. We should have known otherwise, and the fact that we didn't cost us dearly."
As for the new challenges facing Micro-Link, Morton is optimistic. "I feel much better about being in charge of the sales process," says Morton. "In fact, I feel better about us doing it than I do about asking someone else when they are going to get it done."
David R. Evanson, a writer and consultant, is a principal of Financial Communication Associates in Ardmore, Pennsylvania.