New York City may have Mary Meeker, the queen of Internet analysts who works for Morgan Stanley Dean Witter, but Los Angeles has Debbie Simon, the doyen of dot-com valuations, roll-ups and mergers.
And in this time and place, Simon’s work may be even sexier than Meeker’s.
As widely reported, much of the Internet world is in meltdown mode, with many of the e-ventures Meeker once touted now trading for pennies on the dollar. How many pennies? For publicly held companies, that’s easy to see. Just read the stock tables.
But for private-sector e-companies, outside valuation and merger experts have to be brought in. Enter Simon, a banker and vice president at Century City financial shop Houlihan Lokey Howard & Zukin.
“Evaluations are never easy, and this is an unusual environment,” said Simon. “There are a couple things going on. Foremost is that many Internet companies no longer have the options they had. The IPO window is closed. Meanwhile, a lot of those same companies are running out of cash.”
That’s sort of like taking on water in shark-infested waters and then finding out the island ahead was only a mirage. How much is the ship and cargo worth now?
“Yeah, sometimes the decision is either merge with a stronger partner or go out of business,” Simon said.
Obviously, when one transfers cargo to a bigger boat, control and most equity disappear, although Simon prefers to say that entrepreneurs have to accept “evaluations that have become more reasonable.”
To hold out for a better deal, most e-companies these days are trying to reduce their “burn rate” the speed at which they’re eating up their cash hoard. Some are even “operating with an increased emphasis on profitability,” said Simon, formerly an investment banker with Bear, Stearns & Co. who worked in media and entertainment.
Well, the world has changed, or maybe it never did.
Not surprisingly, almost no one pays cash for a money-losing e-venture. Typically, the weaker company is absorbed by a more-powerful e-operation that pays in stock for the acquisition. Then, all involved look to the day when the IPO window opens up, or a larger publicly held company pays in stock (the liquid kind, which can be sold).
Simon is actually one of the 447 employees at HLHZ, which last week had 78 new wannabe bankers and analysts in a week-long training and orientation seminar.
“Last year we had 60, and I remember when it was me and three other guys,” said Scott Adelson, managing director. “Many of the new people, especially the analysts, will return to college for their MBAs. But we are definitely growing.”
Steady work in mergers, restructuring, merchant banking, and financial advisory work has spelled employment growth at HLHZ, Adelson said.
It’s Private
Investors can expect to receive more solicitations from private equity ventures in the years ahead, according to Mark Hiraide, a partner with Torrance-based Petillon & Hansen, a law firm that specializes in working with venture companies.
For generations, extending back to the financial debacles of the Great Depression, general solicitation of investors by private ventures or funds (that is, not registered with the Securities and Exchange Commission) has been outlawed.
But since the late 1990s, there has been a dramatic increase in investor interest in private equity investing, as more financial sharpies want to invest at the pre-IPO stage before documents are filed with the SEC.
The problem is that under federal regulations, any investment scheme or fund involving more than 100 investors has to be registered, meaning expensive disclosure statements must be ginned up on a regular basis.
General solicitation such as running ads in newspapers, or (in the modern era) posting business plans and prospectuses on the Internet has been broadly banned unless it’s properly registered with the SEC.
Additionally, investors in private schemes have to be “accredited,” which means they must have a net worth of at least $1 million, or an annual income of $250,000 or more.
But as of July 1999, there has been some more wiggle room for California entrepreneurs and fund-raisers, according to Hiraide. That’s when the state Legislature passed a new law, the Capital Access Company Law, or CACL, that allows investment companies (funds) to make general solicitations and to accept more than 100 investors as long as all investors are accredited without the necessity of registering with the SEC.
Under CACL, companies making solicitations must be licensed with the state, and must raise at least $5 million, according to Hiraide. The licensed companies may even be able to solicit investors in about 35 other states, depending on the fine print of the offering and the other states’ regulations. However, at least 80 percent of funds raised must be invested within the state of California.
For investors, the CACL means more opportunities to invest in startups or growth situations through investing in private funds, and to be tipped off to such offerings by general solicitation in print or on the Web.
“We have seen figures suggesting there are 600,000 individuals in California who qualify as accredited investors,” said Hiraide.
The Ventures
Downtown Los Angeles-based E-Capital Corp., a $125 million venture banking arm of Wedbush Morgan Securities, announced the appointment last week of Geoffrey Bland as executive vice president.
Bland was formerly a co-founder of ShareWave, a Northern California startup that develops integrated semiconductors and networking software. Bland said that Southern California, even with the growth of venture capital firms here in the last several years, is relatively starved for growth capital.
“I certainly think there are as many entrepreneurs in Southern California as Northern California, but only about one-sixth as much (venture) money is deployed here,” said Bland.
E-Capital, along with local funds TMCT Ventures and Zone Ventures, recently invested in ModeZone, a B2B apparel e-commerce exchange. The amounts invested were not disclosed.
Contributing columnist Benjamin Mark Cole writes about the local investment community for the Los Angeles Business Journal. He can be reached at [email protected].
