According to a recent Coopers & Lybrand "Trendsetter Barometer" survey, the primary funding sources for those fast-growing companies remain the old standbys, particularly profits and working capital generated by the business itself, commercial bank loans, leasing, credit cards, strategic alliances, personal resources and private investors (including venture capitalists). However, the survey also found that funding sources are becoming more focused and more likely to offer flexible terms.

C&L recently reported on the rapid changes in technology that have accelerated the pace and raised the efficiencies for getting from idea to market in "Growing Your Business," a newsletter published by the firm's National Entrepreneurial Advisory Services Group.

"Five years ago, investors had more concerns about how to run a business for a five-year window," says Bob Paglia, the head of Coopers & Lybrand's Boston area Financial Advisory Services practice. "Today many look at their exit strategy practically the day they invest. And, while initial public offerings used to take a year to 18 months, now they're going out in six months."

Investors are becoming more specialized, and financing sources are becoming much more focused in the way they invest money in today's competitive environment. They're bringing both functional and industry expertise to the table.

"Five years ago you saw people investing across the board in good ideas. Today, from the venture capital firms to the leveraged buyout houses and corporations, investors are devising very specific plans for what industries and technologies they want to be in," says Paglia. "New opportunities are being evaluated by investors who want to concentrate on certain kinds of businesses and who have a deep knowledge of them." That means company owners are more likely to be dealing with potential lenders and investors who understand their business inside and out.

A growing number of venture funds are seeking traditional businesses in which to invest these days. "We're seeing more venture capital funds cropping up to go after low-tech or no-tech businesses, such as manufacturing companies that specialize in certain products," says Sid Andrews, an Entrepreneurial Advisory Services partner who heads the high technology practice at C&L's Houston office. "Wal-Mart Stores Inc. has a venture fund that invests in low-tech companies, for example."

Financing sources are becoming more flexible, too. More companies now have a strategy of acquiring new ideas, products and complementary operations as a means to grow their business and gain market share. Financing instruments must allow for this.

"In a marketplace that's growing through acquisitions, it's important that financing instruments include covenants that allow mergers, acquisitions and continued investments," says Paglia.

 PARTNERING TREND

There is also a trend toward financing sources and companies building partnering relationships. In this fast-paced, acquisitions-oriented environment, companies need to find a financing source that will tolerated more risk, ride with them for a number of years and continue to invest in them as their business grows.

"The days of borrowing from one financing source and two years later getting bids from other sources are over," Paglia notes. "Companies don't have time to get subsequent funders up to speed on their business or to build new credibility and trust in their organizations. They need financing sources that allow them to move quickly and will tolerate risk, including acquisitive. Though financing sources are risking more, the rewards of such a partnering relationship can grow and be profitable for all concerned."

One factor affecting buyer prices is the level of competition involved. "Historically, we used to see a big difference between strategic buyers who paid a premium because of the potential for synergy, compared to financial buyers, such as venture capital and LBO houses," observes Paglia. "Now we're seeing the two as more directly competitive."

Venture firms continue to excel at due diligence and feedback, according to C&L's experts. "Even if those potential borrowers that submit their plans to venture houses don't get funding, they are likely to get important feedback on their business plans," Paglia says. "This is also happening in the next stage, as some venture capital firms move toward becoming LBO (leveraged buyout) houses."

Needless to say, all businesses are not evaluated equally by potential funding sources. Factors that C&L specialists describe as "value drivers" exert strong influence over investors.

"As venture houses consider deals today, they're looking at what enhances the value of the company," says Paglia. "These "value drives" differ among the various industry segments. For a technology company, investors may care about a unique technology or a process with great potential, but they won't necessarily worry if the company lacks audited financial statements or an organizational structure."

However, companies in non-technology industries may be held to a different set of standards. "A retail company, for example, must have more that just a new idea," Paglia points out. "Here investors look for time tested value drivers' such as historical performance, gross margins and return on investment."

There is a direct correlation between the size of most venture funds and the size of their investments. As a rule of thumb, as the venture fund grows, so does the size of its investments.

"It takes the same amount of time to analyze a company to invest $2 million as it does to invest $20 million," Paglia says. "So you may see more of a tiering of venture capital firms into those that do a true start-up and those that do later stage venture capital financing."

Research indicates that companies backed by venture capital are larger and grow faster than other firms and are likely to go public.

Venture-backed firms in C&L's "Trendsetter Barometer" survey have a median number of 114 employees, compared to just 60 for those firms that are not venture-backed. The median dollar revenues of the former group are $10.4 million a year, compared to $6 million a year for the latter group.

Last year, the venture-backed group of growth companies rang up an average 36.8% increase in revenue, while their non-venture-backed peers scored a 23.8% rise. The former group had a 55% higher growth rate. What's more, the venture-backed firms expect to maintain revenue growth at a 36.5% rate this year, while the other growth firms expect 26.2%--a differential of 39% between the two groups' expectations.

"Companies that attract venture backing are on a better track as they prepare for the tough scrutiny accorded public companies," notes Jim Atwell, San Jose, CA-based chairman of the Coopers & Lybrand venture capital group. "And they are investing more extensively in the future of their business."

He adds that there is a strong connection between obtaining venture capital financing and ultimately going public. Of the 18% of "Trendsetter Barometer" firms that have received venture capital financing, one-third have already gone public, Atwell notes. An additional 43% plan to do so over the next four years.

"In contrast, among the vast majority of fast growers that never received venture financing (82%), only 12% have already gone public, and just one-third are planning to do so over the next four years," Atwell says.

SEEK OPTIONS

The bottom line is that many new companies with strong potential should seek alternative financing. "Venture capital is very selective," says Andrews. "Venture firms are looking for big home runs that will give them 20 to 30 times returns. Consequently, the businesses that have very good growth potential but not the desired market size need to be a bit more creative in their quest for financing."

One approach that can be an excellent option is corporate partnering. "For example, plugging its product into an established distribution and marketing operation can help a growing company become successful overnight," Andrews advises. "At the same time, it satisfies the partnering company's goal of offering a high-potential new product."

Andrews says that in Texas, "We're seeing groups of individuals starting informal angel investor groups. They're typically business friends looking at deals to invest in with their private funds. They'll invest in a deal they like, get on the board and provide expertise, guidance and leadership. Most of these transaction-oriented folks are still working in their own business, but some are retired and looking for the next deal.

No matter which category your business falls into, if your idea is an investment-worthy winner, financing will come your way. "If you've got a good product or idea, get the word out," Andrews counsels. "There's a variety of networks out there to tap. Once the word is out, investors have a way of finding you."

Whatever source of funding you pursue to finance your business venture, your chances of success will be greatly increased if you present your case armed with properly prepared, credible financial forecasts. This is especially critical in the early stages of a start-up, when the new business is not yet producing revenue, let alone profits.

The business plan that you have prepared should outline what you need to do with the capital you are looking to raise, but you also need a set of financial forecasts that support and document your plan.

"Not only are properly prepared financial forecasts critical for assessing how much money you will need, they also increase the probability that you will obtain the capital you are seeking," says Laura Ring, director of C&L's high-tech services group in Boston. "If improperly prepared, they create the impression of mismanagement, which will increase the risk to your venture and reduce your valuation."

Ring advises following these tips to prepare credible financial forecasts:

MATCH ASSUMPTIONS