Dollars and sense - raising capital

Entrepreneur,  July, 1996  by David R. Evanson

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THE LAST TIME we checked on Larry Morton and Don Duke of Indianapolis-based Micro-Link Technologies Inc. ("Raising Money," July 1995), they were in the throes of raising money from banks and equity investors.

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

For Micro-Link, the stakes could not be higher. Working with Hiarc Inc., a software development firm in Orange, California, Micro-Link developed a data storage and management product called StoreMaster. "The amount of data on computer networks is growing at an exponential rate," Duke explains, "and companies need a turnkey storage solution with intelligent software."

But the company went as far as it could with debt. And Micro-Link devoted considerable cash flow from its industrial computer business to product development. Now, with StoreMaster ready to launch, Micro-Link needs equity capital to kick off its sales and marketing efforts.

Micro-Link's trials and travails over the past year demonstrate just how difficult raising capital can be--even when you've got a great deal. In addition to several dangers inherent in doing deals, the degree of difficulty is compounded by the fact that financing sources are not always what they represent themselves to be. In the final analysis, Duke and Morton decided it would be easier to raise the money they needed themselves than to rely on others to do it for them. Below is a brief history of what led them to this decision, as well as some of the lessons they learned along the way.

* A MODEST PROPOSAL

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

But beauty is in the eye of the beholder. "While some of the bankers at this firm thought Micro-Link was ripe for an initial public offering [IPO]," recalls Morton, "there were others there who thought we should merge with one of the other hightech 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 had never wanted in the first place.

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

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

Morton recalls the bridge financing was to be completed during October and the IPO was to be done in the first week of December. Morton spent the summer preparing the various offering memorandums.

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

In December, with draft seven of the private placement memorandum in circulation, the underwriter asked Micro-Link management to make a presentation before its "commitment committee."

Uh-oh.

"We thought this would be a rubber-stamp affair," recalls Morton. But after the meeting, attitudes changed, phone calls to the underwriter went unreturned ... and, in the end, the plug 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 with movers and shakers. So when the second deal went south, Morton and Duke were able to approach one of their prospective new board members, 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 insurance company where he was executive vice president might want to participate as well. Then the deal got structured so that the only investor would be the insurance company. And when, after months of due diligence and negotiations, the vice president of planning at the insurance company told Morton, "Write me a list of everything you need cash for," Morton recalls, "it was one of the happiest days of my life."

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