July/August 2007

Finding investors to bankroll your business

To budding entrepreneurs, private investment can be a blur of angels, venture capital and private equity, with their differing objectives, time horizons, ownership arrangements, management involvement and, yes, cultures. Here’s how to navigate this complex, sophisticated and highly nuanced marketplace.

By Maxine Golding

If entrepreneurial blood runs through your veins, heed the   advice Phil McKay received from his friend and partner:    “Look both ways and take that step off the curb, because it’s a ball.” That’s just what the President and CEO of PPM Media Inc. did.

What isn’t as much fun is the process of finding investors to help bankroll your business.

To budding entrepreneurs, private investment can be a blur of angels, venture capital (VC), and private equity (PE), with their differing objectives, time horizons, ownership arrangements, management involvement and, yes, cultures. It’s a complex, sophisticated and highly nuanced marketplace, which can be hazardous for the neophyte.

But if ambitious show organizers want to fund fast-emerging opportunities, they must form a clear picture of when to, why to and how to access these sources of private capital. In particular, PE has firmly established itself as the driving force fueling growth and acquisitions in the roiling show and media landscape. And if you have shows in markets with considerable upside potential, chances are PE firms are seeking you out as a budding platform company or an add-on for the companies in which they’ve already invested.

All money, though, is not the same. “Two investors are not equal because they can write a check,” says Neal Vitale, President and CEO, 1105 Media. Choosing the right partner is as much “about personalities and styles.”

Stepping Stones
Think of angel investing, VC and PE as stepping stones.

If you’re gestating a promising show or media idea, angel investors represent first-stage seed money. They may be relatives, friends or business colleagues, some with open time horizons and others keen to get in and get out.

Since angel investing is, by definition, unstructured and not institutional, no standards apply in terms of time horizon, ownership equity received, or payback. It all depends on the relationship of the angel investor and entrepreneur, and the latter’s track record.

“If angels put up money for three years, they generally want to double it,” says Robert Birkfeld, Managing Partner, Compass Group International. “Others may want a 100 percent return per year, based on the speculative nature of the investment.” For a $500,000 launch, an entrepreneur could sell shares at $50,000 increments to 10 angel investors. But if a million dollars or more will be needed, it’s time to take the next step.

VC takes early-stage investing to the institutional level. Firms providing these funds make a series of bets on prospective and new enterprises, spreading their risk across investments. The timeframe of their involvement will be long, as they provide capital, as well as strategic and management expertise. The entrepreneur and/or management team retain a significant ownership position, and the investor’s return generally comes if the company goes public or is purchased by another company.

The risks are very high, but if two out of 10 ventures hit big, VC has made its desired return. “There’s a little more swinging for the fences, so they’ll strike out more,” says Vitale. “But the multiples start in double-digits and from there go up” — way up.

In 2006, U.S. venture capitalists invested $25.5 billion in 3,416 deals, according to a MoneyTree Report by PricewaterhouseCoopers and the National Venture Capital Association, based on data from Thomson Financial. The pace accelerated in the first quarter of 2007, when $7.1 billion was invested in 778 deals, the highest quarterly dollar amount since fourth quarter 2001.

However, little of this institutional VC comes into play in the trade show arena. These funds are drawn to technology-related investments with upside potential for strong growth and high reward, says Tom Kemp, Managing Director, Veronis Suhler Stevenson (VSS). If they look at trade show companies at all, he says, those are likely to have a technology slant, like TechTarget.

The sizzle in the exposition and media sector (and many others) is in PE. Worldwide, the volume of deals in first quarter 2007 involving PE doubled over the same period a year ago, according to Thomson Financial. These investors arrive on the scene with many millions of dollars and an exit strategy in tow. Because they leverage their funds with other people’s money, they’ll be extremely analytical in their due diligence and carefully model expectations.

As later-stage capital, PE seeks out established businesses with infrastructure, positive cash flow and quality management in markets with significant growth potential. Entrepreneurs who want to propel an existing business, gain some liquidity for themselves or partners leaving the business, and still retain an ownership stake (by putting equity back in the business — a requirement of the PE partner) will turn to this source. That’s what Vitale, a former executive with Reed Elsevier and Petersen Publishing, did. Since forming 1105 Media in April 2006 with PE firms Nautic Partners and Alta Communications, he has made six acquisitions and now produces 70 events.

A firm like VSS, with a current fund of $1.3 billion, looks to write an equity check of $50 million to $100 million at a shot. Smaller-market deals may run in the range of $5 million to $10 million. Understandably, PE investors take up to an 80 percent controlling position. In recent years, some firms have raised funds specifically for smaller, minority investments, but may go beyond a single board vote and negotiate approvals over budget, certain acquisitions, capital expenditures and debt financing.

Leverage, ROI and Value
Naturally, the bigger the transaction, the greater leverage it can command. PE brings a level of financing impossible for entrepreneurs to access on their own. The ensuing debt (on a ratio from three to one up to eight to one) will be serviced by the business’s (improving) cash flow. “The average is close to 40 percent equity, 60 percent debt,” says Kemp. “A few years ago, lenders were only willing to fund four times cash flow; we’re now seeing seven and even eight times EBITDA (earnings before interest, taxes, depreciation and amortization).”

The more debt borrowed, however, the more pressure on the operator to meet benchmarks modeled over five years. One financial advisor wryly notes that on the day PE walks in, the purchased company’s staff in finance can double in order to provide reports and details that may be “irrelevant to you as the operator” but vital to the new owners. On the other hand, Paul Mackler, former President and CEO of Cygnus Business Media, sees few differences in the reporting demands, whether companies are PE-owned or publicly held; each has a heightened focus on financial metrics and big-picture strategic and acquisition issues.

Ideally, in five to seven years (and sometimes sooner), PE investors make three times return on equity, sell the business and move on. “Eight times would be a terrific investment,” says Vitale.
“Think one year for investors to get their arms around the business, one year to invest and integrate, one year to move forward, one year to ice the cake,” says Richard Mead, Managing Director, The Jordan, Edmiston Group Inc.

However, ABRY Partners’ Managing Partner Peggy Koenig suspects return prospects are down in today’s environment. “My guess is that a lot of firms are targeting rates substantially below 30 percent, in some cases under 20 percent,” she says.

Still, CEOs and senior management willingly put up their own cash for the chance to participate in a significant way in value creation. While in absolute dollars their investment doesn’t have to be large, say PE investors, it has to be meaningful to the individuals. That could be $100,000 for one, millions for another. In addition, they’re incentivized based on future success — 10 to 15 percent of the increased equity value of the business over the investor’s time horizon.

“You read about PE coming in, stripping a business and selling it,” says David Nussbaum, former CEO of Penton Media who’s now President and CEO of Sundance Business Enterprises, to which ABRY Partners has committed $100 million in capital. “But they can’t sell for a significant return if they don’t enhance the business. My experience is that they perceive a real opportunity to grow the business and hopefully sell it after it has entered new markets, hired great people and upgraded the infrastructure.”

Angels on the way
It was just about “the worst of times” when Joel Davis leapt at the chance to launch a new business model — show incubator. The company he then worked for, Imark Communications, agreed that if Davis was able to raise enough capital, he could manage certain Imark events for a fee and Imark would not incur overhead. (In 2003, Davis would purchase @d:tech from Imark.) The potential deal breaker: Davis had to obtain his funding in the last 60 days of 2001 to launch in January 2002, or the deal would be off.

There he was, post-9/11, when shows were canceling, people were not flying, and rumors of the death of the show industry abounded. Nevertheless, armed with a specific business model, an extensive business plan and a term sheet for investors, Davis approached family, friends and industry veterans. While he had plenty of turndowns, about a dozen private investors — primarily from the trade show industry — heeded the call.

“They knew us, liked the business plan, believed the model and trusted the people they were betting on,” says Davis, President and CEO, JDEvents.

The structure was simple: Davis sold investments in units of $50,000. Some bought one unit, some bought two, but no one bought more than that. Davis remained the single largest investor, buying more than any of his individual angels. Indeed, his own investment represented much of his life savings. “It was important to them that I was taking a bigger risk than anybody,” he explains. “They knew I had plenty of skin in the game.”

The bottomline: Davis raised an amount just shy of $1 million and maintains majority control. He developed the investment terms by “talking to smart people with experience and by working with very good attorneys.” No time horizon was attached to the investments. The angels accepted that they could have been “throwing money out the window,” Davis admits. But if all went well, they had bought a percentage of a business and its distributions going forward. And that’s exactly what happened. “I wouldn’t have done anything differently,” he says.

The rewards: As he communicates with his investors regularly, they provide “feedback and a lot of great ideas,” Davis notes. Indeed some of the launches and acquisition deals the company has made in the past five years are the direct result of suggestions from this investor group.

The future: Davis has no plans to go to the private investment marketplace for more financing since JDEvents’ incubation model is self-funding: buy undervalued shows or launch shows, then sell them and buy and launch again. The number of shows will fluctuate at any given time, but he expects the company will not grow much larger than it is now — producing six shows with a full-time staff of 12. When shows grow to a certain level, JDEvents looks to find them new homes. “It’s a wonderful structure for me,” Davis says.

The VC call
McKay admits that he didn’t educate himself as he should have before working with VC. Yet he has emerged ready to graduate to PE.

When McKay decided he wanted to build executive-level communities in high-growth business-to-business niches within the IT space, VC was not on his radar screen. So he sought five or six industry people to be his angel investors. To his surprise, IDG Ventures Chairman’s Fund, formed by Patrick McGovern and independent of media company IDG, was eager to supply start-up financing, and PPM Media was incorporated in July 2006.

“At the end of the day, our investor turned out to be more of an angel than a venture capitalist,” McKay says. “They look at the numbers from a distance and put no pressure on us to launch shows in a space they want to be in.”

Perhaps that’s because his business model doesn’t follow the traditional trade show path of development. Building communities starts with intensive research on end-users and decision-makers in a market space, those who rarely attend shows and are hard to reach by phone. Next, every association and publication within the market space is invited to participate within the community — even if they compete with PPM. Third, content is brought to Web sites, newsletters, and ultimately events from multiple, wide-ranging sources. The result: Only qualified decision-makers and a limited number of vendors participate in exclusive communities (where they can stay in touch 24-7) and highly targeted events.

Contrarily, “we don’t want events to be scaleable,” McKay says. “We want everybody to know everybody by the end of a conference, and then help them build lasting relationships within the community.”

The first community and event launch focused on blade servers — a minor, but fast-growing part of the storage industry. “We didn’t want to buy right away,” he says. “I’d be lying, though, if I said we weren’t interested in acquiring now that we are off the ground.”

The bottomline: McKay and his minority partners hold a far higher equity position in the company than the 20 percent or less they would have received from PE funding. However, the VC investor provided about one quarter of what a PE firm would have given. “As a management team, we weighed that [trade-off] very heavily,” McKay says.

The current financing provides an opening for PPM Media to come back if more is needed. Sweetening the deal is that there’s no time horizon for any return and no performance benchmarks.
The risks and rewards: By funding through VC, “we underfunded ourselves,” he says. “If you think you need X amount of money, double it. If you think something is going to take X amount of time, triple it. And it will take three times as long for the first sale to come in.”

McKay knows he was lucky the first launch was successful; if it hadn’t been, he and his team would have had to re-evaluate everything. And although senior management came to the start-up with strong reputations with other brands and companies, PPM Media represents an entirely new product. “You have to renew the contacts you had beforehand and justify yourself all over again,” he says.

Still, coming from a global company to a staff of 10 is “a breath of fresh air,” says McKay. “Our corporate atmosphere is all about new ideas. Being an entrepreneur with funding allows this.”
The future: As PPM Media looks to a second round of financing for acquisitions, McKay is concerned that this could put a damper on creativity. “We wanted to be an entrepreneurial company and take advantage of our strengths,” he says. It has: PPM Media is meeting projected year-over-year growth of 50 percent towards the goal of being a $10 million company in five years.

The PE payoff
About eight years ago, Kerry Gumas, now President and CEO of Questex Media Group Inc., trod the angel investor path with difficulty.

Fast forward to 2005, when he learned that the Advanstar business he was running was on the board’s list of assets to sell. He asked for and received authorization to raise a bid on the business. But this time, rather than trying to do all the heavy lifting by himself, he worked with an advisor on vision, strategy, investment requirements and returns. Then he used this professional assistance to identify prospective PE partners. For two and a half months, they visited one financial house after another.

Because Gumas was looking for speed in the transaction, he needed an investor familiar with business-to-business media or at least capable of becoming very knowledgeable very quickly. What was striking to him about The Audax Group, a middle-market PE firm, was its ability 10 days after a first meeting to commit significant resources, including managing directors and analysts, and become “so smart, so fast.” The decision to work with them “was really beyond money.”

In May 2005, the firm provided about $66 million of equity toward the $185 million purchase price for the Advanstar assets, with an optimum time horizon for the investment of three to five years. Included were 23 trade publications, 20 exhibitions, 25 conferences and 50 Web sites in five industries.

The bottomline: Two years in and with $135 million in revenues, the business is 50 percent larger and ahead of plan, Gumas says, with launches of publications, shows and Web sites, as well as acquisitions. “The Audax Group helps us think through and refine our objectives,” he adds. “We have a strong meeting of the minds.”

The rewards: Gumas pinpoints the “huge difference” in being part of a venture like this vs. having a role, even at senior executive level, in a large corporation with its pace and culture. “Frankly, as someone with a short attention span and the desire to create something new, I always found that environment challenging.” he says. “For people who have that entrepreneurial spirit, with its emotional rollercoaster, PE is a very attractive route.”

The future: Entrepreneurs learn very quickly in this environment to leave behind the baggage of what is familiar or traditional today as they reshape and focus on what’s growing and valuable tomorrow. That means delivering ROI and balancing short-term financial returns with long-term growth. Gumas believes that’s the very strategic role PE is playing in the creation of a new b-to-b media industry.

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Watch Your Step 
Don’t let that halo around an impending deal cloud your judgment.

Those who have slogged their way through the process of sourcing private equity (PE) offer these words of counsel:
Ask lots of questions.
What’s the investment “sweet spot” for a firm’s culture and fund size? What’s its reputation? What equity will it commit to future acquisitions? What level of leverage is the firm comfortable with? “I didn’t educate myself before, but now that I’m taking the next step. I’m listening more than talking to a lot of investment companies,” says Phil McKay, PPM Media. “And I’m not going in showing them my cards.”

Get your house in order.
PE expects to see “trending, pacing, trailing numbers and consistent treatment of revenues and expenses month to month, quarter to quarter, year to year,” says Paul Mackler, former President and CEO of Cygnus Expositions. “Most sellers, even bright and talented entrepreneurs, aren’t prepared for the rigorous process of a buyer’s due diligence. It’s very stressful and disruptive. And the more uncertainty in the buyer’s head, the less willing he’ll be to pay.”

Bring strong management to the table. That’s a top criterion of PE investors. “It’s like buying the car, taking the keys, but having a chauffeur for day-to-day operations,” says Kathleen Thomas, Berkery, Noyes & Co. The sweat equity portion of the deal is also a key tool in recruiting senior-level executives who can take the company to the next level.

Evaluate your prospective partner, as this will be a long-term fiduciary and emotional relationship.
In tough times, whom do you want to be with in a foxhole? Talk to CEOs and lenders to understand how they work within the investor’s culture. “Certain PE firms have a deep historical standing in the [media and show] sector,” says David Nussbaum, Sundance Business Enterprises. ABRY Partners LLC was the PE investor at Penton Media when he was CEO, so Nussbaum got to know them “in the best and worst of times” before partnering with ABRY for his new company.

Educate yourself on valuation.
A very small company will be valued at a smaller multiple than a larger company. A business growing consistently at 10 percent will command a larger multiple than one growing at 5 or 6 percent. Markets that grow faster and are less cyclical will boost the multiple. So will a revenue mix that includes online products, along with a very strong management team that can use the capital infusion to bring the company to the next level.

Review the agreement to understand all possible scenarios of the deal you’re going to strike.
“A lot of friends who have been through this process never looked hard and fast at ‘what if…,’ ” suggests Robert Birkfeld, Compass International Group. Make sure you agree on strategy, operational authority, follow-on investments and what happens when things don’t go as planned.

Prepare to be judged to different standards than you’re used to.
Enormous emphasis will be placed on financial models, and the majority PE investor will control the board. You’ll have to “speak a different language and dance at a very high level of sophistication,” Birkfeld says. But if your goals and those of the PE investor are communicated clearly and you can function in a transparent environment, this can be a very rewarding relationship, says Kerry Gumas, Questex Media Group Inc.

Don’t be surprised if you become yesterday’s news.
If a PE partner deems a change of course necessary, expect the CEO to be gone. “If the team they’re backing is doing well, the team will get more latitude and not nearly the level of involvement as when the business turns bad,” says Neal Vitale, 1105 Media. “Every time you see a management change in a PE-backed company, chances are good it was performance-based.”

A sampling private equity investors and advisors active in media and trade show industry

ABRY Partners LLC www.abry.com
Media-focused private equity investment firm with $3 billion of capital under management. Since 1989, completed more than $18 billion of leveraged transactions and other private equity and mezzanine investments, representing more than 450 media properties. Clients: Cygnus Business Media, Hanley Wood, KnowledgePoint360Group, Dolan Media, Charleston Newspapers, F&W Publications.

Berkery, Noyes & Co. LLC www.berkerynoyes.com
Since 1980, provides strategic transaction management and consulting services for information media and technology companies. Specializes in large- and mid-sized companies in the U.S. and international markets with mergers and acquisitions, divestitures, strategic research. Clients: Complete Healthcare Communications, Roxbury Publishing Co., Fawcette Technical Publications, Adams Business Media, ENK International.

Boston Ventures Management, Inc., www.bostonventures.com
Private equity firm founded in 1983; six funds total $2.6 billion in capital commitments. Focused on middle-market media, information and publishing, entertainment, and communications. Clients: New Track Media, Northstar Travel Media Holdings, BPI Communications LP, Jobson Publishing, National Law Publishing Co., Shore-Varrone.

Compass Group International www.thecompassgroup.net
Provides management consulting and merger and acquisition advisory to the exhibition and media industries, from multinationals to single-event companies to media investors and non-profit groups. Clients: Advanstar Holdings Inc., Diversified Business Communications, George Little Management, International Franchise Exposition, Key3Media, Penton Media, Reed Exhibition Cos.

The Jordan, Edmiston Group Inc. www.jegi.com
For 20 years a provider of investment banking services for media and information industries. Client transactions since 2000 represent more than 700 events; in 2006 closed 15 M&A transactions with event companies or an event component. Clients: Reed Elsevier, Nielsen Media, United Business Media, dmg world media, Penton Media.

Veronis Suhler Stevenson www.vss.com
Private equity firm in media, communications, information and education industries in North America and Europe. Since 1987, managed four private equity buyout funds and structured capital fund, exceeding $2.8 billion in capital; invested in 50 platform companies and 220 add-on acquisitions, a portfolio valued at $10.2 billion. Clients: Advanstar Communications, The Chart Show Group, Red7Media.