Sources of Capital - Individual Investors (Private Placements Not From Angels Or Institutions)

Kenneth H. Marks, Larry E. Robbins, Gonzalo Fernandez, John P. Funkhouser and D. L. Sonny Williams



Angel investors typically invest in early stage companies in the seed round of financing. However, there are many individuals who make investments in emerging growth and middle-market companies which are outside the realm of angels. These are the investors we discuss in this section.

Some companies will choose to raise capital using a direct private placement soliciting individuals to participate based on a predetermined deal structure. These deals range in size from a few hundred thousand dollars to $5 million, based on federal and state securities laws; the structure of these offerings varies. The company will establish a minimum investment amount per investor and seek enough to break escrow. Depending on the type of offering, there will probably be a maximum number of investors accepted (typically 35 nonaccredited).

For example, a lower middle-market software company generating $8 million in revenue growing at 25 percent per year needs $900,000 to develop and launch a new product line. Let us assume that the company is not a candidate for institutional venture capital and does not want to increase its leverage. If management has an adequate network to access individual investors, then it may choose to undertake a private placement for the $900,000. There tend to be several types of individual investors.

Types of Investors

  • Unsophisticated emotional investors. These are the folks who are known to the entrepreneur, but who really should not invest directly in any private placement and do not have the financial capacity to lose their investment; however, they desire to provide support to their friends, family, and community. We suggest that companies do not accept funds from these individuals. They will usually be high maintenance for management-and besides, in many cases, it is the wrong thing to do.
  • Middle- to upper-income individuals (nonaccredited). There is a segment of the population that does not fit the criteria for being accredited, but has savings and a desire to participate in growth businesses in the community. Be careful with this type of investor, because most of these individuals will be high-maintenance investors for management.
  • Accredited and high net worth individuals. These are folks who meet the legal requirements for investing and may be reasonably sophisticated (but not necessarily so).
  • Professional investors. There are amply sophisticated, experienced, high net worth individuals who routinely invest in growing companies. They will usually have a desired deal structure that has worked for them in the past. Some of these may also be angels. You may find some of these represented by money managers or trusts through their family office.

From a positive perspective, individual investors will be less sensitive to price and valuation compared to institutional investors. They seek opportunities to invest in their local communities and to tangentially participate in the growth of successful teams; they are really investing in the people.

However, raising capital with a private placement from individuals is a long and hard process. Post funding, a significant amount of time is required in communicating with the base of investors-keeping them up to speed and aware of the company's activities. In addition, management and the majority stockholder(s) have a fiduciary duty to protect the interest of the minority investors; therefore, taking corporate action may require extra steps and time.

The above material is excerpted from:

The Handbook of Financing Growth: Strategies and Capital Structure by Kenneth H. Marks, Larry E. Robbins, Gonzalo Fernandez, John P. Funkhouser and D. L. "Sonny" Williams.

To order the Entire Second Edition of, The Handbook of Financing Growth: Strategies, Capital Structure, and M&A Transactions, 2nd Edition

This material is used by permission of John Wiley & Sons, Inc.

Kenneth H. Marks, CM&AA,* is the founder and a managing partner of High Rock Partners, Inc., providing strategic consulting, investment banking, and interim leadership services to emerging growth and middle-market companies. As CEO he founded a high-growth electronics company and, led and sold a technology business to a Forrune 500 buyer. As adviser, he has worked with managers and board members ro develop and implement growth, financing, turnaround, and exit srrategies in over two dozen companies. Marks' past positions include president of JPS Communications, Inc., a fast-growth technology subsidiary of the Raytheon Compnny, and president/CEO of an electronics manufacturer that he founded and grew to $22 million.

Mr. Marks created and teaches an MBA elective titled "Financing Early Stage and Middle-Markct Companies" at North Carolina State University; and created and teaches "Managing Emerging Growth Companies," an MBA elective, at the Hult International Business School in Boston (formerly the Arthur D. Littlc School of Management) in connection with Boston College's Carroll School of Management. He is the author of the publication Strategic Planning for Emerging Growth Companies: A Guide for Management (Wyndham Publishing, 1999).

Mr. Marks was a member of the Young Presidents Organization (YPO); the founding YPO Sponsor of the Young Entrepreneurs Organization (then YE0 and now EO) in the Research Triangle Park. North Carolina Chapter; a member of the Association for Corporate Growth: and a member of the board of directors of the North Carolina Technology Association. Marks obtained his MBA from the Kenan-Flagler Business School at the University of North Carolina in Chapel Hill.

Larry E. Robbins is a founding partner of Wyrick Robbins Yares & Ponton LLP, a premier law firm locared in the Research Triangle Park arca of North Carolina. He is a frequent lecturer on the topics of venture crlpital and corporate finance and serves on the boards of directors of entrepreneurial support organizations, technology trade associations, and charitable and arts organizations. Mr. Robbins receivcd his BA, MRA, and JD from the University of North Carolina at Chapel Hill. He was also a Morehead Scholar at UNC.

Gonzalo Fern ndez is a retired vice president and controller of ITTs telecom business in Raleigh, North Carolina. Subsequently he spent 15 years working as a finance executive for emerging growth companies and as an accounting and business consultant to other companies. He is a past president of the Raleigh Chapter of the Institute of Management Accountants. He received his BA in accounting from Havana University, Cuba. He wrote the book Estados Financieros (Financial Statements) (Mexico: UTEHA, third edition, 1977).

John P. Funkhouser has been a partner with two venture capital funds, and operated as chief executive officer of four companies in a variety of industries from retail to high technology. In his venture capital capacity, he was a corporate director of more than a dozen companies and headed two venture-backed companies. The most recent company he led from a start-up concept to a public company is a medical diagnostics and devices business. Mr. Funkhouser worked in commercial banking with Chemical Bank of New York, in investment banking with Wheat First Securities, and in venture capital with Hillcrest Group. He has an undergraduate degree from Princeton University and an MBA from the University of Virginia, Darden Graduate School of Business Administration.

D. L. "Sonny" Williams is a managing partner at High Rock Partners. As CEO, for over 25 years he led three global manufacturing/technology companies through major transitions; and as an adviser, he has worked with companies in numerous industries to create value and implement change. Mr. Williams has over 30 years successful operating experience in engineering, manufacturing, sales/marketing, and senior executive roles. His career is highlighted by having led the turnaround of three global manufacturing/technology enterprises ($50 million to $330 million in revenues in nine countries) over a 20-year span in CEO/president/director roles, serving the automotive, consumer, industrial, aircraft, and medical component markets. Mr. Williams' leadership accomplishments include successfully achieving dramatic lean enterprise-based cost restructures, low-cost country expansions/sourcing, and accelerated organic growth through strategic value proposition repositioning; complemented by leading eight acquisition/ merger/joint venture-related negotiation/lintegrations. Mr. Williams' value-creating experiences were magnified by successfully repositioning two of the corporate companies for investment-attractive management buyouts.

Mr. Williams received his BSEE from Kettering University and his Executive MBA from the Kenan Flagler Business School at the University of North Carolina, Chapel Hill. He is president of the Association for Corporate Growth (Raleigh-Durham chapter) and a member of the National Association of Corporate Directors.

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* The Certified Merger & Acquisition Advisor (CM&AA) credential is granted by Loyola University Chicago and the Alliance of Merger & Acquisition Advisors.