It’s a fulltime job reading investor sentiment these days, and apparently a confusing one for the business press. On consecutive days last week, local reports had stocks rising one day and falling the next on news the Fed would continue ‘quantitative easing’.
There’s little confusion though about the difficulty Colorado small business is having raising capital. Money has always been the bane of start-ups and early stage companies, but today, it’s become an especially tough game. It’s leaving worthy companies without working capital and the service professionals who raise money and manage deal flow singing the blues.
“The rules have changed”, says Andrew Hurry, senior investment banker with The Yale Group, a FINRA-registered broker-dealer based in Denver. “There’s far less tolerance for risk, investors are looking for larger deals, they’re taking longer to close, and now both clients and investors are blowing up deals prior to closing. It’s often like holding two live snakes and not knowing which one will bite first.”
Hurry’s been raising capital for growth and early stage companies in Colorado and internationally for the dozen years or so I’ve known him. He describes a pervasive nervousness about the economy that’s fundamentally changed the investment landscape.
“I attended an Aspen Business Luncheon where John Calamos, a very well know asset manager, was the guest speaker. I couldn’t believe the questions I was hearing from an audience of very high net-worth individuals, like, ‘What will happen to the US economy when the dollar loses reserve currency status?’ or ‘What do we do now that we’ve lost the ability to use gold as a hedge against equities?’ The individuals weren’t asking how to grow their net worth. They were concerned about not losing the value of the current investments.”
The deals that are getting done tend to reflect this risk-averse sentiment. “When I started in investment banking back in 2000 many of my clients were pre-revenue healthcare and technology companies that were looking for capital to complete product development and get to market launch. Today, many VC’s are now looking at companies only with demonstrable and sustainable cash flows where their investment helps revenues and business grow; or help with execution on a business plan already in place. Deals that can be categorized as having no market risk, no technology risk, and no management risk”, Hurry explained.
“The result is that early stage companies have to be more creative in terms of sources of capital – friends, family, non-traditional lenders, crowd-funding – and do a lot more with a lot less resources.”
Hurry’s assessment isn’t a surprise for Colorado start-ups and growth companies. In the few short weeks we’ve published CompanyWeek I’ve met several entrepreneurs frustrated with the shifting investment sands. It’s no secret that the primary barrier to higher deal flow here is money, not a lack of ideas or risk-takers willing to set the wheels in motion to build a new company or follow a dream.
In Andrew Hurry and likely other investment bankers and brokers, Colorado entrepreneurs have an empathetic partner. “These companies are in a ‘catch-22’”, he says. “Great companies with great products and proven management teams are being left hanging to struggle on with limited resources while investors sit on a perch waiting for the ‘blood in the water’ feeding frenzy.”
It’s enough to leave even a seasoned dealmaker shaking his head.