Where is the Capital?

Many entrepreneurs and innovators are asking where there is available capital and financing or have given up the search. Most would agree that the popular opinion is that capital is not available or the markets are essentially frozen. This could not be further from the truth - there is plenty of capital and financing to go around but getting a placement of capital takes a more methodical approach. This article will outline where the capital is and how to approach the current capital markets.

Most successful investors will tell you that their money is and was made in recessions/ market downturns. There is a ton of "smart" capital on the sidelines waiting for the right moment. This is the time period that makes or breaks entrepreneurs. It is our opinion that now is an excellent time to move forward as an entrepreneur; however, it will not be easy. That is precisely why we believe now is great timing for ambitious entrepreneurs. Recessions force entrepreneurs to expand their horizons and rise to the challenge. Free flowing "smart" capital creates innovation. Therefore, the current environment is going to bring out the best in our entrepreneurs. So where is the current capital and financing? Three major categories represent the largest and most viable capital in the marketplace below.

US Corporations

Corporations have become some of the greatest investors in the capital markets since the dot com boom. People now realize that the next Google is just as likely to come from a studio apartment as it is a research and development department at Cisco. As a result, American corporations are looking to find the next competitive advantage and many have dedicated capital to invest or acquire high growth companies with innovative technology.

Currently, US corporations are saving cash and waiting for a shift in the market. Moody's Investor Services recently reported that US corporations are hoarding $1 trillion dollars in cash. This is a tremendous source of entrepreneurial financing. The top four industries with cash according to Moody's are the following:

1. Technology - $207 billion
2. Pharmaceuticals - $124 billion
3. Energy - $105 billion
4. Consumer Products - $101 billion

The preservation of cash is partially due to the recession and market conditions but also a strategic shift for corporations looking for strategic investments, mergers and acquisitions. More and more corporations are starting venture capital funds to identify and purchase the new innovation or company at a much cheaper price than obtaining the company from a traditional venture capital exit. For example, Google has launched their venture fund called Google Ventures. This is a trend that we expect to continue. Watch for new corporation based venture capital funds for opportunities.

Venture Capital Firms

Venture Capital firms experienced the best fund raising environment in history from 2005 to 2007 which lead right into a recession. As a result, venture capital and private equity firms are sitting on commitments and are looking to invest into good companies. Prequin (www.preqin.com), the London-based research house, notes that the global private equity industry's uncommitted assets continues to exceed $1 trillion (2009), suggesting that there is still plenty of capital waiting searching for the best opportunities.

Below is a breakdown of the $608.9 billion in uncommitted capital in the United States private equity and venture capital.

1. Buyout Funds $507.1 billion
2. Real Estate Funds $194.1 billion
3. Venture Funds $153 billion

Foreign Direct Investment

The United States is still the world's largest recipient of Foreign Direct Investment (FDI). More than $325.3 billion in FDI flowed into the United States in 2008, a 37 percent increase from 2007. Even though America is going through a market downturn we are still the country of opportunity, innovation and entrepreneurship. Listed below are a few reasons why the United States is still an attractive environment for investors.

1. R&D: The US is the Center for Global Innovation: More Nobel laureates in science than any other country since 1990.

2. Consumers: The US makes up 42 percent of the global consumer goods market.

3. Education: 4,000 Universities, 6 of the top 10 worldwide.

4. Infrastructure: The US has the largest roadway system, railway network, and number of airports of any nation.

5. Job Creation: Between 2003 and 2009, over 4,500 new projects were announced or opened by foreign companies in the US, yielding over $314 billion in investment and about 632,500 new jobs.

There are still very large amounts of capital in the world that are looking for good investments and the United States is still the number one location for high quality innovation and entrepreneurs. For example, the Australian Superannuation retirement system currently has approximately $1 trillion in assets for a continent with roughly 25 million people. Therefore, Australia must be an exporter of capital. Australia is just one of several examples of foreign direct investment opportunities for entrepreneurs.

How to Obtain “Smart” Capital:
Now that the capital has been identified how do entrepreneurs go about obtaining “smart” capital? The capital markets can be difficult to navigate but with the correct approach one can use the capital markets to fuel growth and success. Below is a brief outline of steps that are crucial to obtaining "smart" capital.

1. Know how to present your opportunity. It cannot stressed enough - entrepreneurs have a tendency to get the cart before the horse which is disastrous when seeking funding from “smart capital”. Entrepreneurs should take the time to truly build out a comprehensive strategic business plan, presentation, use of proceeds statement, financial modeling and due diligence package.

2. Seek outside counsel/experts. An objective third party to thoroughly review your plans, models and presentations will help prepare entrepreneurs for actual investors.

3. Do not shortchange yourself. Build a long term capital markets plan and seek terms and conditions that will support your growth without crippling the company.

4. Stay positive. We still live in the land of opportunity and recessions/market downturns are when people truly succeed.

Jerry Inman

Page last updated Sunday, December 4, 2010


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