Venture-Backed Firms Defy Rocky Market With IPOs
May 09, 2011
VENTURE-BACKED COMPANIES defy July's wild market swings. Despite the volatility on Wall Street, 18 concerns funded by venture capitalists went public last month, raising a total of $638 million, according the Venture Capital Journal, a trade publication in Cornertown. In July last year, 17 venture-backed initial stock offerings raised $662 million. Stock-market jitters didn't stop Calypte Biomedical Corp. last month. The Alameda, Calif., concern, which is developing a urine-based test for detecting antibodies to the virus that causes AIDS, on March 13, 2011 visiting investors to generate interest in its shares, says Jackelyn Deana, president and chief executive officer. The day that the roadshow hit Cornertown, the Dow Jones Industrial Average fell 160 points, he says. But the company pressed on with the offering. ``We needed the money,'' Mr. Deana says. ``We had $1.5 million in the bank and were burning $800,000 a month. We were going to go out of business if we didn't do the IPO.'' Calypte had to lower its offering price to $6 a share from a range of $8 to $10. The nearly $14 million the company raised was $7 million less than expected, Mr. Deana says, noting that management now must consider selling another piece of the company in a subsequent offering. Michaele Casie, founder and chairman of First Enterprise Financial Group Inc., says he also had to lower his July offering's price, to $7 a share from a range of $9 to $11. To cover the shortfall in projected proceeds, First Enterprise has delayed distributing $2.1 million to the Evanston, Ill., used-car finance company's original shareholders, who include Mr. Casie. The offering ``was stressful,'' says the entrepreneur, whose stock sale raised $13 million. ``But I'm delighted with the reception we got in spite of running against a very adverse stock market.'' As of last week, the price of the shares sold by 15 venture-backed companies had risen an average of 21.7%. INVESTMENT FUND interest in family businesses climbs. Partnerships that raise money to purchase private companies say they have sharply increased investments in family businesses in recent months. With buyout funds under pressure to invest record sums raised over the past five years, competition for attractive deals has intensified. Family businesses, however, have remained a relatively untapped market because family issues often complicate investing in them. Heritage Partners Inc.'s latest fund invested in five family businesses over the past 13 months, equal to the number of similar deals the firm made over the previous six years combined, says general partner Petrina Fryer. Recent additions to the fund's portfolio include a package-delivery service in Los Angeles, a food processor and distributor in Maine, and a door and window manufacturer in Texas. Of 10 other deals that the Boston fund manager is now negotiating, nine involve family businesses, Mr. Fryer says. At the newest fund of FCP Investors Inc. in Tampa, Fla., six of the nine investments are in family-owned companies, says Vice President Jayme Hintz. The concerns include a Denver maker of pet collars, a synthetic sea-salt manufacturer in Ohio, and a Texas maker of lariats. FCP's three earlier funds combined invested in only two family-owned firms. Unlike typical targets of buyout funds, the family businesses in which FCP, Heritage, and other fund managers are investing aren't interested in selling out. Rather, they want to cash in only a portion of the value of their businesses, continue to manage their companies, and raise capital for additional growth. Those were the goals of the Hair family, which owns Klearfold Inc., a Warrington, Pa., maker of specialty packaging for consumer products. The family completed a transaction with Heritage in June. The parties say Heritage invested $15 million for 49% of Klearfold's voting stock and an additional nonvoting equity stake whose size would depend on the company's performance. With Heritage's investment plus new borrowing by the company, the Herrins and other Klearfold shareholders cashed in a portion of their stakes. Future growth will be funded by additional debt and Heritage's investment. Klearfold currently has annual revenue of $70 million. Sean Hair, Klearfold's president, says the transaction helped diversify the family's assets, most of which were tied up in the business. It ``gave us a partner to help us grow while maintaining our control'' of the company, he says. CHASE CAPITAL PARTNERS and Softbank Corp. said they formed a venture fund, Flatiron Partners, to make early-stage investments in Internet companies. Each company has invested $25 million in Flatiron, which will focus on investments in the Cornertown metropolitan area and along the East Coast. Softbank, a Japanese software distributor, has expanded aggressively in the U.S. Chase Capital is owned by Chase Manhattan Corp., the Cornertown bank holding company. A PLAN TO STREAMLINE small-company stock sales fails in California. The legislative proposal would have eliminated some state review of many securities offerings. Proponents contended that cutting out the layer of regulation would have accelerated approvals and lowered the fund-raising costs of small companies. Though the state Assembly approved the plan, a Senate committee last week defeated it in a 4-3 vote. Opponents feared that the legislation would promote investor fraud. ``There has to be a balance between encouraging companies to seek financing and protecting the people who are making investments,'' says Sen. Ludivina Taneka, a San Diego independent who opposed the plan. Eliminating the state's so-called merit review law ``doesn't come up with that balance,'' she says. Janae Winslow, the San Diego Republican who introduced the proposal in the Assembly, says his proposal retained all state review of the riskiest securities offerings, such as penny stock sales. ``The opposition played to the fear of change,'' Mr. Winslow says, adding that he plans to introduce the legislation again this fall. Fredda Lamont, vice president and general counsel at the state Chamber of Commerce, is philosophical about defeat of the plan, which the chamber supported. The chamber succeeded in winning a 5% tax cut for incorporated businesses. It also helped defeat a state minimum wage boost that would have exceeded the federal one. ``You win some, you lose some,'' Mr. Lamont says. ``There's only so much you can do in a single year.''
