Dollars and Sense One company's odyssey through the ups and downs of raising capital.

The last time we checked on Larry Morton and Don Duke ofIndianapolis-based Micro-Link Technologies Inc. ("RaisingMoney," July 1995), they were in the throes of raising moneyfrom banks and equity investors.

The good news: Micro-Link got a new bank and increased its lineof credit. The bad news: The company is still searching for thatall-important layer of equity capital.

For Micro-Link, the stakes could not be higher. Working withHiarc Inc., a software development firm in Orange, California,Micro-Link developed a data storage and management product calledStoreMaster. "The amount of data on computer networks isgrowing at an exponential rate," Duke explains, "andcompanies need a turnkey storage solution with intelligentsoftware."

But the company went as far as it could with debt. AndMicro-Link devoted considerable cash flow from its industrialcomputer business to product development. Now, with StoreMasterready to launch, Micro-Link needs equity capital to kick off itssales and marketing efforts.

Micro-Link's trials and travails over the past yeardemonstrate just how difficult raising capital can be-evenwhen you've got a great deal. In addition to several dangersinherent in doing deals, the degree of difficulty is compounded bythe fact that financing sources are not always what they representthemselves to be. In the final analysis, Duke and Morton decided itwould be easier to raise the money they needed themselves than torely on others to do it for them. Below is a brief history of whatled them to this decision, as well as some of the lessons theylearned along the way.

A Modest Proposal

In January 1995, Duke made a pilgrimage to New York City to meetwith several investment banking firms. Of the four meetings, onefirm showed particular interest in Micro-Link's storage device.In fact, Duke recalls, this investment banking firm connected theStoreMaster to its own computer network-and promptly fell in lovewith the product.

But beauty is in the eye of the beholder. "While some ofthe bankers at this firm thought Micro-Link was ripe for an initialpublic offering [IPO]," recalls Morton, "there wereothers there who thought we should merge with one of the otherhigh-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 hadnever wanted in the first place.

Not to worry: By late spring, another investment banking firmwas "hot to trot." So, letting the first suitor wither onthe vine-a tactic which, in hindsight, Morton says was amistake-Micro-Link focused on the new proposal.

This investment banker issued a letter of intent to underwrite 1million units priced between $5.50 and $6.50 per unit. The unitsconsisted of one share of common stock and one common stockpurchase warrant, which would allow the holder to buy an additionalshare at a predetermined price. In addition, the firm offered to"bridge the deal," meaning they would also underwrite aprivate placement of $700,000 that would be repaid once the IPO wasdone. Later on, this amount was increased to $1 million.

Morton recalls the bridge financing was to be completed duringOctober and the IPO was to be done in the first week of December.Morton spent the summer preparing the various offeringmemorandums.

But when the underwriter got behind schedule, the deal gotpushed into November. And when executives from the underwritervisited Micro-Link to discuss the bridge financing, Morton recalls,"They tore apart the offering memorandum so badly, it causedeven more delays."

In December, with draft seven of the private placementmemorandum in circulation, the underwriter asked Micro-Linkmanagement to make a presentation before its "commitmentcommittee."

Uh-oh.

"We thought this would be a rubber-stamp affair,"recalls Morton. But after the meeting, attitudes changed, phonecalls to the underwriter went unreturned . . . and, in the end, theplug got pulled on the deal.

Power Brokers

Happily, though, in preparation for being a public company,Micro-Link had already begun to stock its board of directors withmovers and shakers. So when the second deal went south, Morton andDuke were able to approach one of their prospective new boardmembers, 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 insurancecompany where he was executive vice president might want toparticipate as well. Then the deal got structured so that the onlyinvestor would be the insurance company. And when, after months ofdue diligence and negotiations, the vice president of planning atthe insurance company told Morton, "Write me a list ofeverything you need cash for," Morton recalls, "it wasone of the happiest days of my life."

But Morton's joy began to fade when the insurancecompany's MIS manager questioned Micro-Link's strategy foraddressing the storage market. Without his backing, the whole dealbegan to tilt, until finally, it toppled-just two days afterthe insurer had asked for that list of proposed expenditures.

At this point, almost a year had gone by since Micro-Linkstarted trying to raise money. But while Morton and Duke didn'thave any capital to show for their efforts, they had somethingalmost as good. "With all we had been through, with the sevendrafts of the private placement memorandum, and with all theinvestors we had talked to," says Morton, "we had theconfidence we could raise the money ourselves."

Lessons Learned

And so Morton began to structure a new deal-one he feltconfident Micro-Link's executives could sell to localinvestors.

But aside from the evergreen truism "Trust inyourself," exactly what pearls of wisdom did Morton and Dukeacquire along the way? Following are five lessons Morton says theylearned the hard way at a cost of some $250,000.

1. Offer a clean slate. "We made the mistake ofbeing half-merged with our technology partner at the time we werelooking for capital," recalls Morton. Had Micro-Link and Hiarcmerged before seeking outside capital, he says, they would have hada much easier go of it.

2. Always keep a fallback position in your hip pocket. Ifyou accept the reality that most deals fall though, Morton says,you'll take better care of the capital sources that show aninterest in you, and keep them up to date, even if they are notworking on a transaction. "After our second transaction fellthrough, we couldn't very effectively go back to the firstone," he explains, "because we had basically let therelationship go."

3. Be selective about financial advisors. Morton saysMicro-Link used several financing consultants. While consultantscan be worth their weight in gold if they produce, they're adrag on cash flow when they don't. Morton's advice: Hireone if you must, but don't stick with him or her too long ifyou don't see results.

4. Explore your local options first. "When webrought on the Hiarc technology," recalls Morton, "we hadan incredibly exciting opportunity-but we never presented itto local investors. As we later found out, there was a lot of localsupport for what we were doing, but we got too caught up in sellingthe 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 alonghad the authority to do the deal. Talking to the 'senior vicepresident of investment banking' sounded pretty good to us. Weshould have known otherwise, and the fact that we didn't costus dearly."

As for the new challenges facing Micro-Link, Morton isoptimistic. "I feel much better about being in charge of thesales process," says Morton. "In fact, I feel betterabout us doing it than I do about asking someone else when they aregoing to get it done."

David R. Evanson, a writer and consultant, is a principal ofFinancial Communication Associates in Ardmore,Pennsylvania.