Venture Capital: Tight But There - Radio World

Venture Capital: Tight But There

Many Financing Options Remain Available to Small Entrepreneurs Looking to Enter or Grow In Broadcasting
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Many Financing Options Remain Available to Small Entrepreneurs Looking to Enter or Grow In Broadcasting

The major obstacle that most small and minority-owned broadcasters face in acquiring new radio stations is access to capital.

In an effort to facilitate access, over the last decade venture capital groups have formed and grown with the goal of making resources available to such businesses.

While this assessment rings true today, it was actually the opening paragraph of an article I wrote for Radio World back in March of 1995, titled "Venture Capital Remains Feasible Option for Many."

Shortly thereafter, the Telecommunications Act of 1996 was signed into law and therein began one of the greatest feeding and consolidation frenzies in the history of the radio industry. However, the frenzy appears to be over and the market is trying to recover from a recession and the effects of the Sept. 11 tragedies.

Screeching stop

Increasingly once again, the investment environment for radio has tightened.

In a recent study released by the BIA Financial Network, "Radio Transactions 2001: Where Did All the Deals Go?" radio industry analyst Mark Fratrik writes, "With the pronounced slowdowns in the overall economy and especially in the advertising marketplace, radio station transaction activity came too a screeching stop in 2001. After several years of previously unimaginable numbers of stations sold for breathtaking prices, the number, and more significantly, the total value of radio stations that were sold in 2001 noticeably decreased."

At the same time, there has been talk on the street that venture capital, which was plentiful during the dot-com surge and in the aftermath of the '96 TC Act, has completely dried up.
Top Three Mistakes Entrepreneurs MakeAccording to A. Jerome Fowlkes of BIAfn, entrepreneurs tend to make several mistakes.

First, they frequently want to do it all themselves; in a complicated venture financing, that can be a recipe for disaster.

Second, entrepreneurs frequently wait too long before raising the necessary funds for an acquisition.

You cannot sign a purchase agreement for a radio station, which requires a closing in 60 to 90 days, and only then begin looking for the money. Preparation and review of the business plan, as well as setting up the initial meetings can all take 60 days even before any due diligence is done. Then the paperwork, negotiation and financing take additional time.

Last, entrepreneurs frequently lack a satisfactory exit strategy. This is something with which venture capitalists are always concerned. They want to know how they are going to get their money back with a proper rate of return on their investment.
Although consolidation and the slowing economy have decreased the number of radio transactions in the market, many small radio operators and analysts remain optimistic that there are opportunities for those who are prepared and informed about the strategies for obtaining capital. As such, the government and industry analysts recently set out to spread the word that the deals (and the capital) are still out there for those who are willing to look.

Financing available

On May 2, the FCC's Office of Communications Business Opportunities, which is the office of the FCC charged with assisting and promoting opportunities for small businesses in broadcasting and telecommunications, held a Small Business Financing Seminar to put forth the word that many financing options remain available to small entrepreneurs looking to enter or grow in broadcasting and other communications industries.

The seminar comprised two panels, one featuring venture capitalists and private capital fund representatives, another featuring government representatives. The program was designed to give entrepreneurs the opportunity to learn how to finance their businesses.

Without a doubt, the most interesting panel discussion at the FCC's seminar was made up of representatives of the venture capital community, including the Telecommunications Development Fund (TDF), BIA Financial Network, Syncom Management, Quality Management, Emerging Venture Network and Fairview Venture Management.

Speakers on the second panel included representatives from the Commerce Department, the FCC and the Small Business Administration, who described various governmental training and funding programs.

Higher hurdles

Ed Shirley of Fairview Venture described his firm as a "fund of funds" which considers telecommunications and media as an attractive area for investment. However, he said, several trends have evolved in the venture capital market.

First, Shirley believes that the hurdles for entrepreneurs are higher than in the past because venture capitalists are forced to be pickier about their investments in today's recovering market.

That dynamic has led venture capital firms to be more aggressive and require more favorable terms in the deal than had been required during the boom market. Increasingly, according to Shirley, investments are being broken into stages that will be released only after the company has satisfied certain performance milestones. This keeps the entrepreneur on a short leash and puts the pressure on returns.

Shirley's advice for the entrepreneur is to look for a venture capital firm that brings more than just money to the table, such as core competencies that will add value to the deal and business.

Darrell Williams of the TDF, a $50 million early-stage venture fund created by the Telecommunications Act of '96, echoed Shirley's observations.

Williams noted that VCs are not risk-takers, but "risk-managers." Whereas two years ago, an early-stage company could get two or three rounds of funding before having a "customer-facing event," today, according to Williams, most venture funds would limit companies to a single round before they produced any revenue.

Also, most interestingly, Williams stated that if he were an entrepreneur, he would try virtually any other way to get money rather than going to a venture capital fund, the reason being that venture capital is very expensive compared to other alternatives such as banks.

However, he urged entrepreneurs who did pursue venture capital to stay on it and not get discouraged by initial rejections.

"Stay in their face" was his advice and he admitted that he currently is looking at deals that initially had been turned down a few years ago.

It was also pointed out at the seminar that TDF maintains an excellent Web site at www.tdfund.com with tutorials on how to prepare a business plan and how to make a presentation to a venture capital fund.

Venture management

Such passion was also an important feature for Duane McKnight of Syncom who noted that his venture capital team will look hard at the management of the venture. Syncom, according to McKnight, is looking for "passionate leaders" who will grow the business.

In contrast, A. Jerome Fowlkes of BIA Financial Network, who has worked on several radio broadcasting transactions, noted that the independent thinking of many entrepreneurs can get them into trouble when it comes to getting financed. He identified mistakes that entrepreneurs frequently make, as noted in the sidebar box.

Deals, dollars

The overall conclusion of the FCC seminar was that deals and money are available, but you have to look hard and be prepared.

In fact, Fowlkes recently authored a study, "Is There Money Out There?" in which he cites a 2002 PricewaterhouseCoopers survey that found that nearly $40 billion was invested by venture capital firms in 2001.

Although this number was a significant decrease from the nearly $100 billion invested in 2000, it nonetheless represented $306 million invested in the media and entertainment sector in the fourth quarter of 2001 and nearly $2 billion that went into the media and entertainment industry during all of 2001.

Fowlkes' study notes that if you've listened to reports in the media over the last two years, you might believe that all the venture capital in the world has disappeared. However, statistics show that venture capital firms still make investments in broadcasting, although at a significantly slower rate than in the past.

In his study, Fowlkes reaffirms the points he made at the seminar by identifying four steps in getting access to those venture funding dollars.

First, you must start the fundraising process early. Second, don't go at it alone - assemble a qualified acquisition and fundraising team. Third, develop a comprehensive business plan and financial model. Last, understand the terms and conditions under which capital sources are investing.

To obtain a copy of Fowlkes' study, visit the BIA Web site at www.bia.com.

If you were unable to attend the FCC Small Business Financing Seminar but would like to know more, contact the FCC's Office of Communications Business Opportunities at (202) 418-0990, or watch an archived video of the entire seminar over the Internet at www.fcc.gov/realaudio/publicforums.html.

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