Mr. Marsden is an attorney at Lanier Ford in Huntsville, AL. His practice is concentrated in the areas of corporate law, securities, and technology. He advises clients entering into private equity transactions and assists them in negotiations with venture capitalists.
- Middle-market Alabama companies in the $10 million to $50 million range can have a difficult time finding capital.
- Bank inactivity has forced underserved middle-market companies to look for opportunities in private debt.
- Organizations like the Huntsville Angel Network provide structure and efficiency to the investment process so that those looking to invest make well-informed strategic decisions with their money.
- For companies above $50 million on the acquisition side, most capital comes from out-of-state.
- State and local governments should create incentives for retaining top talent.
- A diverse management team and a strong board of directors make a company more attractive to investors.
Q: What is your opinion on access to capital in Alabama?
A: In our state, access to capital is tricky — especially for smaller companies. I mainly play in the middle-market and have come to find that companies in the $10 million to $50 million range are underserved.
It’s increasingly difficult to access capital outside of the few population centers we have in Alabama. In cities like Birmingham and Huntsville, though, angel activity is emerging. For example, the Angel Investor Management Group (AIM Group), a network of angel groups, has been active across the state.
Bank inactivity has influenced access to capital in Alabama. After the credit markets tightened up around 2008, we found that in 2009 and 2010 credit lines were not getting renewed, which made it difficult for small companies. For those above $10 million, access to capital has been slightly easier because they have a more predictable cash flow, which allows them to get credit easier.
The underserved $10 million companies are looking elsewhere for capital and have found opportunities in private debt. Individuals reinvesting in small companies seems to be the substitute for the bank’s inactivity in private lending. Companies who are looking to grow rapidly tend to favor the debt option. The money they gain from angel investors is most often used for expansion and working capital.
Q: Why is there so much angel activity in Huntsville?
A: Given the relatively modest size of Huntsville, we have generated several publicly traded companies and government-contracted companies that have done well, like Adtran. This success has created a community of high net-worth individuals who want to give back on both the mentoring and financial sides. Huntsville also has a large professional class, especially on the medical side, with individuals who like to invest.
With a high number of individuals looking to invest, organizations are popping up to connect the community of investors and companies. The genesis of the Huntsville Angel Network was to provide structure and efficiency to the investment process so that the individuals who have limited time and resources to do due diligence on their own could make well-informed, strategic decisions with their money.
Q: What kind of money is available to each category?
A: Under $10 million companies:
A true startup is usually receiving investment from an individual angel or friends and family.
A: $10 million to $50 million companies:
I am mostly seeing minority equity positions. The companies are looking for expansion. A minority player will be brought in as a strategic investment. When you bring in minority investment, though, you have to deal with dilution and management issues. Venture capitalists want their input on major decisions, so equity can be costly in dilution and autonomy.
A: $50 million to $100 million companies:
Most deals at this level are a takeout, an actual selling of the company. In this market, there’s a lot of interest, especially from out-of-state investors.
Q: How much of the money in Alabama is from out-of-state?
A: For companies above $50 million on the acquisition side, most of the money is from out-of-state (75% out-of-state estimate). If you’re under $50 million, it’s flipped (75% in-state estimate).
Q: Do you need more out-of-state money in Alabama?
A: Absolutely. It’s a challenge overcoming old stereotypes of the South. State and local governments play a large role in changing perceptions by marketing the state and community across the country. Local governments can make their communities more attractive to investors by enhancing their quality of life with restaurants, good schools, strong subdivisions and a low cost of living. Being able to attract and retain talent is always important. In Huntsville, we have made great progress away from reliance on government contracting and we’re now transitioning to a more technology-based community.
Q: What could companies do to make themselves more attractive to funders?
A: Internally, companies need to have a strong and diverse management team. Also, companies need a properly functioning board of directors. It’s important to clean up everything within the business. If investors start to find issues, they will wonder what they didn’t find. Messiness multiplies.
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