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Until the bottom dropped out under the dotcom stampede, business owners saw very few headlines about growth financing for traditional low-tech businesses. But with high-flying tech companies nose-diving, banks and investment firms seem to be not only helping more established nondotcoms, but also proudly publicizing the fact.
Huntington Capital, a San Diego-based SBIC just licensed by the SBA in January, has announced that its focus is primarily on getting much-needed growth capital into the hands of small businesses that have been around for at least two to 15 years and have proven business models and consistently good margins. Those companies, says Barry Wilson, president and CEO of Huntington Capital, have always had the hardest time getting cash. For one thing, bankers often don't give entrepreneurs all they need because they don't have enough capital to satisfy the bank's loan-to-value ratios. And venture capitalists typically don't want to waste time on a million- or half-million-dollar deal when they could spend the same amount to raise $10 million or $50 million or more and get a much higher return.
of major U.S. firms say they won't meet 2001 revenue targets.
SOURCE: Management Association
"So the question is, How do you realize value out of the investment if you can't take the company public or sell it?" says Wilson. "What we do is try to find alternative ways to realize that value." One way is to offer capital in the form of mezzanine debt, where investors-which for Huntington are two Southern California banks and a pool of individuals-participate in the growth of the company through either stock warrant or royalty arrangement. The entrepreneurs pay back the debt in five to six years or convert it to equity.
"So it's quasi equity. It's debt with equity features," says Morgan Miller, a senior vice president with Rancho Santa Fe National Bank, which coordinates its efforts with Huntington Capital. "Investors can share in the growth, get a reasonable return, and exit the deal, as prearranged."
That sounded good to Alan Cash, who was looking for capital for his 7-year-old company, Terra-Kleen, which has a patented system that uses solvents to clean contaminated soil. "The environmental industry is a pretty ugly marketplace," says 43-year-old Cash. "And we're not a dotcom. We have very little sex appeal other than that we're able to make money in a market nobody else is making money in." But with the company growing at a fast clip and most of its assets pledged to SBA loans, Cash was having trouble finding financing he could afford. Rancho Santa Fe referred him to Huntington, which worked out a deal for $1 million in mezzanine financing-$500,000 to start and the other half after two months of solid financials. As part of a royalty-based structure, Terra-Kleen will pay a fee to Huntington if revenue goes above the $3 million to $4 million it's at now. "But if we're both wrong and I don't have the growth, I don't pay a premium for this money," says Cash. "So it's limiting my downside potential."
It remains to be seen whether Huntington's model will catch on, or whether traditional small businesses will attract more investment dollars now that Nasdaq-bound companies are less palatable. Some suggest there may be more funding for traditional small businesses simply because venture firms and later-stage equity players are returning to their roots. "Some of these guys saw unbelievable activity in '97, '98 and '99, and they said this is a bandwagon they must be on," says Edwin Goodman, general partner of New York City-based Milestone Venture Partners. Those firms focused on traditional low-tech businesses prior to the high-tech boom, then switched gears when they saw the huge profit potential in that sector. "A lot of money moved in that direction," he says. "What's happening is it's moving back again."
C.J. Prince is a New York City writer who specializes in business topics and the executive editor of Chief Executive magazine.
- Huntington Capital, 11988 El Camino Real, San Diego, CA 92130, (858) 259-7654
- Milestone Venture Partners, 5511 Madison Ave., 7th Fl., New York, NY 10022
- Rancho Santa Fe National Bank, El Tordo at La Granada, Rancho Santa Fe, CA 92067, (858) 457-1755