Just a few years ago, banks and venture capitalists were handing out money to just about anyone, especially if the word “Internet” appeared anywhere in the business plan.
If you’re looking for funding today, the money tree has been picked clean. Market conditions have caused many public and private lenders and investors to close the purse strings — in many cases, even if the business or proposal is sound.
So if you’ve been rejected in a search for funds, understand that it may have as much to do with the market and less to do with your business plan.
“The deals that are being done are getting larger,” says Kenneth Hirsch, a managing director at McDonald Investments Inc. “There used to be a lot of $75 million to $100 million deals, but the minimum level is about $250 million now. Investors want liquidity in the market, so they are shying away from the smaller deals.”
Hirsch spoke at the “Doing Business in Turbulent Markets” seminar held at the Forum Conference Center in Cleveland March 14.
Environmental risks, such as asbestos claims against several large companies, along with market volatility have further soured the investment community.
Consolidation in the banking industry has also hurt the availability of money.
“There are a lot fewer players,” says Hirsch. “One plus one does not equal two for a bank’s credit exposure.”
When two banks merge, rather than keeping a combined exposure equal to the sum of both banks individually, the exposure is typically reduced to about 1.5 of the original amount, meaning less money being lent.
Many foreign banks have also exited the U.S. market, meaning fewer options for money sources.
Analysts are also predicting a 70 percent probability that the Federal Reserve Bank will raise interest rates 25 basis points at its May meeting.
Other traditional fund raising means, such as initial public offerings, are facing tough markets as well for smaller companies with market caps of less than $200 million.
Searching for funding under the current market conditions means showing potential investors a can’t-miss prospect with a solid business plan. “Earnings growth is hard to find,” says William Koehler, a managing director at McDonald Investments who also spoke at the seminar. “It’s tough right now for the deals to get done.”
