Recap: M2

Aug 03, 2015

Company Details

On July 27, the first-of-its-kind Manufacturing Growth & Investor Conference brought together a broad swath of financial professionals and manufacturers in a half day event that covered issues ranging from workforce development to reshoring to innovation in the supply chain -- and of course the whole gamut of financing options. (Read Part 1 of this two-part series here.)

Panel #2: State of Lending & Investing (Moderator: Greg Pfahl of Hein & Associates)

"It's back to business," said Todd Munson, Chase's market president in Denver. "The banking environment is very vibrant and very competitive."

Joe Van Haselen, president of First National Denver, agreed with that assessment. "Banks are increasingly aggressive looking for financing opportunities," he said. "Just in the past three years, I've seen an incredible recovery."

And manufacturing is one of the industries leading the way, he added. "If you're in manufacturing, you're probably in a pretty good place."

Private equity has also targeted the sector. "In the last two or three years, manufacturing opportunities have skyrocketed," said Emmett Mosley IV, managing partner at Chicago's JZ Partners. "As a business owner, it's a good time to evaluate an exit strategy or bringing in a partner."

"The liquidity of capital is up," seconded Chris Bouck, principal of SDR Ventures, an investment bank in Greenwood Village. "It's a great time to be accessing the capital markets, especially if you have a very defined need."

Bouck said consumer products, particularly "branded consumer products," along with aerospace, electrical equipment, and medical manufacturing were the hottest areas in Colorado, but startups still faced an uphill battle for funding. "Early stage capital is the hardest to come by, by far," he said. "It's larger amounts going to fewer companies."

Greg Pfahl, Jon Robinson, Ross Shell

Ross Shell, founder and CEO of Red Idea Partners in Boulder, called valuations "friendly," noting that a 1X-revenue valuation five years ago has jumped to 3X or 4X today. It might even be a bit frothy, he added. "I wouldn't be surprised if we saw a correction."

Jon Robinson, CEO of UMB Bank, recommended closing on loans in the near term, noting, "Interest rates are still low." But that might change soon, he added. "Get ready. Higher interest rates are coming."

Colorado's manufacturing community might not be as robust or established as its Rust Belt peers, but its star is rising -- and it's notably diverse. "If you look back to the '80s, we were very reliant on oil and gas," said Robinson. When oil prices tanked in 1986, the lack of economic diversity hit hard. "We had a depression here in Denver."

The recent softening in oil prices, by comparison, hasn't packed the same kind of punch, he added, and a strong manufacturing economy has helped weather the bust. "It's healthy for our economy to have these jobs," Robinson noted.

"Early stage capital is the hardest to come by, by far. It's larger amounts going to fewer companies." Chris Bouck, SDR Ventures

The prevailing attitude: No economy can live on service alone. "Manufacturing is a very important part of every economy," said Van Haselen.

Bouck said that Colorado is a great state for manufacturing for three reasons: the baked-in entrepreneurial spirit; low energy prices; and its "backhaul city" status. "Trucks come here full and leave empty," he said of the last of the three. "Freight rates are very good on the Front Range."

Shell pointed to another local plus. "Colorado is a great place nationally to bring a food and beverage or consumer product to market, due to all sorts of demographics."

Robinson said the first thing they look at with potential deals is the company's leadership team. "Management by far is number one," he noted. The flip side? "If you're betting the ranch on a new product, that's going to give us pause."

Munson agreed, noting, "I think building a team of trusted advisors is important for the growth of a company."

And IT and other systems should be another priority for manufacturers seeking money. "If you want to scale your business and grow, your systems have to be tight," said Mosley. "It helps you operate better and tells us as an investor you really have your eye on the ball."

Robinson offered a last piece of advice: "If you're going to surprise your banker, make sure it's a good surprise."

Jordan Eisenberg, CEO Urgent RX

Panel #3: Creative Financing for Growth Companies (Moderator: Joanne Baginski of EKS&H)

Andrew Cousin, CEO of Longmont-based Circle Graphics, printer of 65 percent of the billboards in the U.S., recounted his grandmother's advice on cookies. "When they're passing around cookies, take a cookie," referring to the easy availability of capital for some businesses.

And of all the fiscal cookies for manufacturers, Cousin said he likes the concept of an equity partner. "If you stub your toe, you've still got a 30 percent shareholder whose interests are totally aligned with yours."

Another place he recommended looking for funding: your existing customers and vendors. "Those are the people who have a vested interest in your success," explained Cousin. "Relationships are key. The earlier you start developing relationships with potential sources of capital, the better."

Sparkling clean books don't hurt. "We have good monthly financials. We have reviewed financials," said Lynn Weberg, president of Palmer DCS in Englewood. "There really is something to that."

After Weberg and other employees bought the drive control system manufacturer, the company's bank wanted "a divorce," joked Weberg, and they needed to find a new one. "We kind of started from scratch. . . . A lot of it is networking -- your accountants and lawyers."

The company's leadership found another bank and set up a line of credit. "It's a little more expensive but I don't have to sweat it every quarter," he said. "We just have to have the assets."

"We have been very unusual in how we funded the business," said Jordan Eisenberg, CEO of Denver-based UrgentRX. "I raised exactly zero dollars traditionally." Considering that he's raised $30 million to date, that's saying something.

Working with family offices of billionaires like Sam Zell "has led to some interesting relationships," he explained. "We're very aggressive in how we build our business. We put it on the line every day. That's not necessarily something a banker wants to hear."

He said that when he raised his first $1 million, "I thought that would be enough to take me to the finish line." Not so fast. "I'm astounded at how much it takes to grow a business."

He offered a bit of advice. "Do your diligence on them like they're doing on you. A bad investor is worse than no investor. . . . I sat down with 500 people to get 15 investors. It's hard. You're running your business. But effort is rewarded."

Eisenberg further touted convertible notes. "Down the line you can convert it into equity or pay it back," he explained. "That's great for an early-stage business." Flexibility aside, the real beauty of the convertible note is "delaying the dialogue of valuation."

Michael Schultz, CEO of Sedulous Foods in Englewood, warned about reading the fine print. "You have to be very careful," he said. "You can give your company away in the process."

When the company's hot sauce went national with Kroger and other grocery chains, it was a big leap. "You have immediate needs," said Schultz. "You have to manufacture continuously."

The Sedulous strategy involves "transitional moves," he added. "You need certain types of money to bridge that gap” -- purchase order and accounts receivable financing, to name a couple. Denver-based Premier Trade Solutions "helped us tackle these huge orders.

Vincent Tucker, formerly of Tucker Safety Products, started the company in the mid-1980s, made fire-resistant accessories "to keep cooks and chefs from burning themselves," and sold the company in 2014.

Persistence was important. He lost $200,000 in year one. A consultant recommended quitting, but she didn't know he had gone to 63 trade shows that year. The product took off and he never needed outside financing after paying off those initial debts.

"Make sure you know what you want, what you need, and where you're going with it," he said.

Paul Harter, CEO of Aqua-Hot in Frederick, described an interesting financing model that involved a buy-back from a donor-advised fund set up to fund youth ministries in honor of the company's late founder.

His prime directive when it comes to raising capital? "Know yourself," he said. "Know your risk tolerance."

He related his involvement in a bad IPO in the 1990s. "We were going to be millionaires," he said. "We ended up thousand-aires and defendants in a federal class-action lawsuit." The failed strategy? "Go out and get everything you can get. We got a bunch, then we couldn't deliver. We blew it. We didn't know who we were."

One thing Harter could never find for Aqua-Hot: a loan without a personal guarantee.

Cousin was aghast. "My personal philosophy is never, ever, ever give a personal guarantee."

Larter surveyed the crowd for a banker who could finance Aqua-Hot without a personal guarantee and got a few yeses. "Raise your hand," he said. "I want to talk to you after the panel."

Any parting advice?

"Be willing to walk away," said Schultz.

"Know there are other options out there," echoed Weberg.

Offered Eisenberg: "If you want money, ask for advice. If you want advice, ask for money."

"Never, never, ever give a personal guarantee," advised Cousin.