Herman: John L. Herman Jr., Author

Going Public

We spoke yesterday about raising capital to fund your venture. And while most of you are looking for less than one hundred thousand dollars to get something started, eventually that seedling business may grow and need a great deal of capital to become a huge success.

When one venture I owned many years ago was small, with just six locations that I funded myself, or with a few small partners, I knew that company could be nationwide with the right financial backing. I went to banks and was turned down for the same reasons that I listed in yesterday’s posting. Then I went to Venture Capitalists and didn’t get any warm fuzzies about them helping. And then fate stepped into the equation. I sold my original shop to raise money to continue my efforts at building a national organization, with an agreement in place that it would be operated as a Franchise, with royalties paid to the parent company which I formed. And the woman who bought that location introduced me to her son, a Stock Broker.

The Broker looked over my plans because his mother was about to invest a significant amount of money to buy that original spot. In doing his Due Diligence, he felt, like I did, that if one worked as well as that location did, and we already had five more doing well, then we could have 1,000 in time. But how do you raise the money to make the dream come true. The Stock Broker thought we might be able to raise the funds by going Public. That means selling stock to the Public and instead of having debt, we would have shareholders who now also owned part of the company. And while that meant giving up a major portion of the company, we would have the capital necessary to grow into a large national firm. But, how do you get started? Who helps you go Public?

The first thing we needed was an attorney and to do that you need funds. We raised over one hundred thousand dollars by sending out a notice to personal friends and business people we knew. And I went to every Stock Brokerage firm in Baltimore and was turned down by all of them to “take us Public.” The last alternative was doing a “self-underwritten” deal. I wrote a “red herring” which touts to potential investors what our company would look like if we raised enough capital and anyone could buy stock in the pre-offering stage at a deep discount, provided they didn’t sell their shares for at least two years.

I hand carried the documents to Washington and once approved, started selling stock for five cents a share. Don’t laugh, that is how much Comcast shares were when they started that company. We went to New York to obtain a clearing house bank that agreed to handle the Initial Public Offering (IPO) and we were off to the races. Hundreds of thousands of dollars were rolling in. We had a deadline by which a certain amount of money had to be raised or it would all be returned. Since we hit the amount required we were able to keep the money and begin trading the stock. We started our price at twenty-five cents a share, five times what the early investors paid. Within days of our IPO we were trading at one dollar a share, twenty times what those first investors put up. One guy had put in fifty thousand dollars and within a week of our going Public his stock was worth one million dollars. My own shares were worth over two million dollars. For a company that had been started with fifteen thousand dollars just two years earlier.

There was a second tronch of money due from “warrant stock” which I will explain in another posting. But the company never got that second burst of investment and we crashed needing the money to survive. All was lost. Franchises kept going, but the parent company went bust. Something that happens every day in America to many small business owners, but something I never dreamed would happen to me!

Raising money in the Public arena is tough and that method is full of pitfalls that can bury you. And while many companies survive that way, we did not. And I would only recommend “going Public” for a company with national potential and a very solid amount of capital in place when the offering is complete to weather any storm in the start-up and growth phase.

• Posted: 25 January 2008
• Comments: 0
• Category: Starting a business

Comments