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Where Has All the Money Gone?

By Jill Andresky Fraser

You’ve built a profitable company on the cusp of expansion. All you need is some capital to fund your growth plans. But if your company isn’t high-tech, getting it will take creativity

After a wild and crazy year in the capital universe, the first E-mail message that I got after New Year’s Day seemed to be, well, just one more sign of the times: “We are in need of anywhere from $30 million to $100 million. … Can you help me with some advice please. This project has been dropped in my lap. That’s OK but I could use some good advice.”

There’s never been a time like this. Forget tulip-bulb mania; no matter how besotted Holland’s investors of the 17th century might have been, there probably weren’t too many burghers of the time who had the audacity to ask for help in finding — and to expect to get — their equivalent of my correspondent’s megamultimillion-dollar goal. Just consider what happened in the financial world in 1999. Some 544 companies raised a record-breaking $65 billion from initial public offerings, thousands of other businesses merged-and-acquired their way through at least $1.4 trillion worth of deals, and the Nasdaq Composite Index rose by more than 85% — the biggest annual gain of any major stock index in the history of the U.S. equity markets.

There has never been a time like this.

Thanks to a remarkable rise in the market trading value of public stocks (and an economy boosted by low inflation and technology-driven productivity gains), we have entered an era in which a huge amount of capital is wending its way through the equity and debt markets. It’s not so surprising, then, that many people, like my correspondent, have concluded that it’s now possible to raise money for just about any and every business venture.

But the sad reality is that they’re wrong.

Despite all that available money, especially in the equity arenas, many entrepreneurs — maybe even most entrepreneurs — still face significant difficulties when it comes to finding outside funds to support their company’s growth strategies.

It’s heartbreaking but true. Investment banks may have raised a near-record $2.1 trillion for deals in 1999, but the vast majority of business owners (especially owners of small companies and low-tech start-ups) didn’t stand a snowball’s chance in hell of getting their hands on any of it. For plenty of good companies that had strong prospects (if they could only raise the capital!), financing options were — as usual — somewhere between limited and nearly nonexistent.

Here’s the straight story behind all those jubilant headlines and dizzying statistics that tend to pervade the media these days. During the past year or so — as tremendous new wealth was being created an entrepreneurship flourished across the nation — two distinct tracks developed in the equity-financing market. And while it may seem simplistic to define them as “the dot-coms” and “everybody else,” those descriptions are not far off.

As Paul Schaye, a managing director at New York City based Chestnut Hill Partners, an investment-banking firm specializing in mergers and acquisitions, puts it, “The markets have become bipolar.”

The most favored child of today’s capital markets is, predictably, a hypergrowth technology company: a kind of business that runs the gamut from online retailer to telecommunications service. So many companies in this category have successfully bucked all the age-old financing rules of thumb that it sometimes feels as if an entirely new world of capital has been created. During 1999 everyone from private-equity firms to day traders seemed to have money to burn when it came to investing in this endlessly proliferating, financially voracious sector. Meanwhile, low-tech companies, even those with well-established niches, healthy cash flow, and vibrant growth potential, were left to fight for the table scraps.

The photograph of iVillage cofounder Nancy Evans smoking a celebratory cigar after her red-ink-trailing company’s $87-million initial public offering seems emblematic of one side of today’s capital markets. The other side might be perfectly encapsulated by Schaye’s description of one of his recent airplane flights.

“I sat next to a guy who had built up a $200-million Main Street, America, type company. Profitable. Very successful. And he was complaining to me that he had absolutely nowhere to go unless he was willing to sell out to a larger company. He couldn’t go public. He couldn’t attract venture capital,”

Schaye says. “Those markets were completely closed off to him and to any other company that wasn’t a dot-com, a real glamour business like Martha Stewart, or a massive leader like UPS.”