In the rough

Entrepreneur, Sept, 1998 by David R. Evanson, Art Beroff

In just nine months, Scimitar's owners have cobbled together a far-flung empire. First, there's the manufacturing facility in Garden Grove, California, where 150 employees manufacture custom golf clubs to individual specifications with a proprietary process known as tri-matching. Then there are the two California telesales operations (in Carlsbad and Irvine), which employ more than 50 telemarketers. Scimitar also produces a catalog that features a full line of apparel and accessories, and is launching an independent dealer network to sell clubs directly to golfers and golf pros. Nickell, an avid golfer with significant industry experience, says of the company's growth, "We don't see any end in sight."

Candell acknowledges the potential but expresses concern over the prohibitive cost of growth. "Every month, we hire new people in sales, marketing and manufacturing; we purchase increasing amounts of raw materials; and we stock more inventory," he says. That doesn't even include the side deals Scimitar has made to accommodate expansion, such as buying out the leases of and relocating its neighbors in the industrial park that houses the manufacturing facility. Although the company's cash flow is strong, with expansion at this pace, Candell and Nickell need a layer of capital so the company can catch its breath.

GROWING PAINS

Remarkable as the Scimitar story is, it represents a nationwide trend that's particularly strong, according to studies, in Los Angeles and Orange Counties, California. That's because gazelles, defined as extremely fast-growing companies, often face a potentially crippling shortfall of expansion capital.

According to a study recently released by the California Research Bureau, the 35,000 gazelles in Orange County face a capital shortfall of close to $5.4 billion. Nationally, the shortfall is even more staggering and potentially more crippling - since gazelles are credited with, well, the lion's share of job' creation.

Despite this capital shortage, there has been relatively little information available on how to overcome it. Following are several financing techniques that gazelles such as Scimitar, as well as other up-and-comers, might do well to consider:

* Sell the revenue stream. Many entrepreneurs fixate on selling equity in their companies to raise capital. Break out of the box. Why not sell investors what they really want: a slice of the revenue stream? That's right - ask investors to advance capital in the form of a loan, which gets repaid as a percentage of product or service sales.

What do you get? Three of the most important benefits include preservation of equity, a larger pool of potential investors who are attracted by the prospect of an immediate cash return, and likely circumvention of all state and federal securities laws, since the advance on a royalty deal is a loan, not a sale of securities. On the flip side, however, royalty financing works only for companies with high margins and strong product or service sales (or the prospect thereof shortly after financing).

* Tap ACE-Net. ACE-Net the Angel Capital Electronic Network - is an investor-matching service affiliated with the SBA. ACE-Net was developed after years of public policy debate about how to link the country's estimated 250,000 angel investors with the growing legions of companies looking for growth capital. ACE-Net was launched in late 1996 and today, though still in its infancy, boasts 18 offices nationwide that help entrepreneurs list on the electronic service.

The mechanics of ACE-Net are simple. Accredited (read: wealthy) investors registered with the service gain access to a list of businesses seeking capital. Entrepreneurs pay a small fee to list their companies on the system. Similar to a stock market, the uniformity of information and ease of access generate a greater flow of funds between capital seekers and capital providers.

Streamlined forms and a short application make the use of ACE-Net a no-brainer for a gazelle or any other company looking for growth capital. You can take the first step by visiting ACE-Net on the Web at www.sba. gov/ADVO. At this site, you can also find links to ACE-Net feeder offices near you.

* Get a loan guarantee. When you consider that banks actually lend other people's money, which they must pay back upon demand, it's no surprise that they're so conservative. In fact, commercial banking and small businesses are a lousy match to begin with: Banks need predictable cash flow above and beyond what it costs to service a loan plus good collateral to liquidate, while small businesses have unpredictable cash flow and generally little in the way of collateral. You can satisfy the bank's need for safety and still preserve the equity of your company with a loan guarantee from a third party, such as an angel investor.

The benefits of such a loan guarantee are manifold. First, unless the guarantor is an extremely hard bargainer, a loan guarantee will not cost you any equity. Second, there is a larger pool of investors that will guarantee a loan for, say, $1 million, than will cut a check for $1 million. Of course, if the deal goes south, then the investor will have to cut the check. But when you're romancing investors, this is secondary in their minds because they believe they can pick the winners and avoid the losers.