My role as a capital strategist to Fortune 1000 ventures and to capitalized startups is to direct my clients in ways to drive up the valuation of their company or intrapreneurial corporate venture, so that we might create wealth for the founders and investors, and create a solid return on investment for the Fortune 1000 corporations.
Capital strategy determines the best kind of capital to accept from the best source at the best time and valuation. To do this, it is important to understand the larger economic timing of hype, boom, bust, stagnation and recovery.
With this year’s renewed recovery, strategic choices about capital become critical to the success of a corporate venture or new startup. In this “jobless” recovery, more and more of the unemployed are starting new businesses. On January 6, 2004, the U.S. Small Business Administration called a moratorium on new government-backed loans, due to an overwhelming flood of applications. Here is an overview of the capital markets, current as of January 2004.
Signs of the recovery
There is money available to invest, both in the venture capital coffers and from certain private investors. The post-boom shake-out is over, and although there are not as many players, the ones remaining are seasoned in risk.
Investors, both institutional and corporate, do not take much risk during unstable times. At this time, with the current Iraq war technically over, with no findings of weapons of mass destruction, with minimal damage to Iraq’s oil fields, there is a renewed sense of stability.
Interest rates are expected to remain low. The Gross National Product (GNP) growth, predicted in mid-2003 to be slow but steady at 2-3% in the U.S., skyrocketed in Q3/2003 to 8.2% and is expected at 6% for Q4/2003, once the numbers are in. Overall GNP for 2004 is now expected between 3-4%.
Even more telling of a healthy recovery is the sudden increase in capital equipment spending (particularly in telecom and voice-over-IP) in Q4/2003, the first sign since 1999.
One corporate finance department of a major brokerage appeared a few months ago in their own regional offices, asking their money managers to alert them to any private (IPO-bound) or public companies looking for mezzanine or growth capital of $5 million or more in debt or equity vehicles. The regional offices had not seen their finance folks for over three years!
Merger and acquisition (M&A) activity is reappearing -- the positive, strategic kind which consolidates market position. St. Paul Insurance is merging with Travellers; Caremark is acquiring Advance PCS in the pharmaceutical field. And creative strategic alliances are appearing in the form of asset sales, transfer of intellectual property, stock swaps and ongoing business alliances: Corning and Vitesse and Alcatel all transferred technology to Avanex in various strategic long-term deals.
We are seeing a new and steady increase in the number of convertible debt vehicles issued – i.e., debt issued that is convertible to stock upon company success. This is a clear sign of optimism.
Investor concerns
Investors are conservative again, as they were historically. The craziness of the boom has passed, and the get-rich-quick artists (both investors and entrepreneurs) are gone. There is less pressure on them to invest than in the boom days, and investors’ deal offerings are tough on performance of the young company or internal corporate venture. On the other hand, there has been so little investment in the last couple of years, that there is a general restlessness to get into play again, given the country can maintain any sense of economic stability.
Investors and economists worry about threats to the continuing stability: about another terrorist attack; about a setback in the general economy’s recent growth; about another Enron-scale scandal. This helps to maintain the conservative nature of investment.