Sunday, June 19, 2011

Angel investment on increase

Business owners trying to raise capital in Arizona are finding an improving market as long as they can show meticulous loan officers and angel investors a good plan for how to spend the money, attorneys who structure the deals say.

Although the capital markets remain nowhere near the heyday of the recent past, banks are lending, providing that borrowers meet more stringent requirements regarding assets and/or equity, said Ryan Berry, an attorney in corporate and securities law at Polsinelli Shughart in Phoenix.

"The important thing is many of them now have directives from . . . their boards of directors and from their investment officers to deploy capital, which they didn't have awhile ago," he said.

"That's not to say they're going to go out and make bad loans. You certainly still have to justify it. In cases of real-estate development, oftentimes folks are saying they're seeing requests for 50 percent equity in the project, but there is money available now to borrow."

Berry is the chairman of a panel of attorneys, financiers and bank representatives that today will discuss financing and protecting business assets in troubled economic times. The discussion is part of a seminar, "Ridin' the Storm Out." It is one of more than 40 training opportunities for those participating in the State Bar of Arizona's 78th annual convention at the Westin La Paloma hotel in Tucson.

In addition to real-estate investments, Berry said, the news also has been better for the owners of startup companies who often have to find funding from angel investors or venture capitalists instead of banks because entrepreneurs often lack assets and revenue.

He said banks have told his firm they are expanding to meet the so-called middle market, money lent to companies that do less than $25 million in annual revenue. Some are willing to go down to $10 million in revenue if the company shows promise, he said.

"Banks are more open to smaller loans," he said. "Banks have said, 'We want to start generating revenue off the deposits and assets we know we have.' The only way they're going to do that is to get loans out there."

Larry Hecker, a panelist and corporate- and securities-law attorney at Hecker & Muehlebach in Tucson, said accessing capital is still challenging despite some promising economic signs.

"The capital sources seem to be fewer and more difficult to penetrate," he said. "There have been several trends that are developing.

"You're seeing a lot more focus on valuation now than you had in the past. In some cases, the term sheets are getting more complicated and more detailed and the due-diligence process more intense."

Hecker serves as counsel to Desert Angels, a non-profit organization of accredited investors in Tucson who seek to invest in regional startup or early-stage companies.

There are encouraging signs, he said, adding that members of the Desert Angels invested nearly $3 million in 13 deals in 2010. Eight of the transactions involved follow-on funding. The money was given primarily for high-tech ventures in several industries. So far this year, the group has been involved in four deals.

More so than in the past, investors and entrepreneurs are intensely negotiating the valuation of startups, Hecker said.

When a group of angels or a venture capitalist is going to invest, the valuation of the company is important because the amount invested buys a percentage of the company. Most angel investors look to exit the company in four to six years from the date of investment.

Entrepreneurs still have avenues like U.S. Small Business Administration loans. Most banks have lending officers who are well-versed in the subject, Berry said.

"It's important if you're thinking about entering that market that you clean up your own credit report," Berry said. "The problem is a lot of people got theirs dinged up over the last few years."

He suggests those looking to expand their business look at assets and come up with a detailed business plan on how the money will be spent.

"As an example, if you've been running your business in a way that's advantageous to your own personal tax situation and it looks like it's been losing money in certain situations, that's not going to really play well at the bank because they're going to want something that looks like it's profitable, they can lend against it and they're not going to be exposed," Berry said.

Hecker said business owners should be prepared for hard questions from investors, including what's unique about their idea, technology or service. Investors also will consider management teams carefully, he said.

"Be prepared to explain to an investor how and when they're going to get their money back, what is the exit strategy," he said, adding that it's important that business owners practice their pitch to ensure they get through it in the allotted time given.

"Oftentimes, people get up to make their presentations and they have 20 slides, and they start rushing, and the most important ones may be at the end, and you really can't give them the focus and attention they deserve," Hecker said.

He recommends that owners of early-stage companies look for alternative sources of capital, including government grants and programs.

The publicly available marketing data that Berry reviews shows that loan issuances in the first quarter of 2011 rose more than 60 percent from the same quarter in 2010, an indicator that there is a lot of pent-up demand.

"Now, it's down from the last quarter of 2010, but still it's up when you're looking at it from last year to this year as opposed to just quarter to quarter," Berry said. "It's certainly a good trend."

Although the future appears brighter, there are still a lot of businesses working their way through the bankruptcy process, he said. For those on the precipice of insolvency, the panel will discuss ways to delay foreclosure and retain parts of the business.

"It's not as cut and dried as sometimes people think about going into bankruptcy," Berry said. "It's not 'We give up. Here are all of our assets.' You do have the opportunity sometimes to put together a plan on how you can work out the existing obligations that you have and maybe repay them on a different timetable than was originally in the loan document."

Recent economic data indicate the recovery is not as healthy as was hoped, but the overall trend appears headed in the right direction, he said.

by John Yantis The Arizona Republic Jun. 16, 2011 12:00 AM

Angel investment on increase

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