Middle Market Deals and how to buy, sell and raise capital from $5 to $500 million

A discussion is raging on the web among bloggers who have an opinion about Advisory Capitalists.

First, let me tell you what I think is meant by this new term.  I believe it is intended to represent a group of people who have become powerful (my word) in the web 2.0 economy by being early adopters of new technologies, specifically by blogging and networking on-line.   They have developed genuine expertise and influence in an emerging industry--expertise and influence that previously was found primarily among venture capitalists whose money garnered them their power.  Advisory capitalists do not contribute capital, but provide that power and influence that venture capitalists traditionally do.

By extension, the label of "advisory capitalist" can be applied to any advisor, consultant, guru or guide who provides, under any basis of compensation, assistance or advice to early stage businesses.

While giving my guest lecture at the University of Utah this afternoon, I invited the students to author a question for my blog with the promise that the best question would go up--with an answer:

Amy Schaber (shown here) asked, "What is the best indicator that a company will succeed?"

Answer:  As the question was phrased in the singular, that is, what is the best single indicator, I will answer that way.  The best indicator, though not a perfect predictor in isolation, is the management team.  What we look for is people who have succeeded before.  The bigger the better.

The investment thesis is that there is a process to creating value in an organization.  The process can be studied, mastered, perfected and most importantly repeated.  That said, the not every deal a serial entrepreneur attempts will yield value.  A great entrepreneur knows when to say enough and move on.

I've recently been giving some thought to the on-line practice of building and selling databases of venture capital firms.  It seems like such a great idea to buy a directory, especially if you can get actual E-MAIL addresses.

I once had a client who had purchased a list of 2,000+ venture capitalist e-mails and was planning to casually send a blast e-mail to everyone on the list.

I almost killed myself trying to jump in front of that train. I've often said that there is no such animal as an angel investor--only friends and family who happen to know what they are doing.  That is an exaggeration, but the fact is that angel investors and venture capitalists don't like to invest in people that they don't know or can't vet with people they know well.

The process of raising capital can, therefore, take many months or even years as you build your network in the venture community.

The other day, when I heard the news, I mentioned to a friend that a former client of our firm had filed.  My friend, a private equity investor and former securities lawyer, asked if it was a good filing, i.e., for an IPO, or a bad filing--neither of us wanted to say the word.

In fact, LoveSac, a client for whom we helped raise almost $12 million of private equity, venture capital and angel financing in 2005, filed for bankruptcy protection under chapter 11 earlier this week.  I count founder Shawn Nelson as a friend--as I do the investors.  I can only imagine how hard this is for him, knowing how his friends, family and "angel investors" are being impacted.

I have told the shareholders with whom I have communicated and that we had encouraged to invest in the deal, that no one was more disappointed than I by this outcome.  I've also expressed my hope that the company can use bankruptcy to successfully restructure and preserve value for shareholders.

I am not privy to any inside information, have not had communication with the company and don't intend to comment after tonight on this topic.

As an entrepreneur or mid-market executive, you really want to know a few key people in the "deal community" in your local market.  Typically, these folks can be found in one place, one group, one organization, one association.  In larger towns, there may be several key groups to join.

In Salt Lake, where I live and work, there are several organizations.  The first group on the scene was the MountainWest Capital Network (formerly the MountainWest Venture Group).  Over the years, a number of other important groups have been formed, including a local chapter of the Association for Corporate Growth and the Utah Information Technology Association, among others.

As an officer of the MountainWest Capital Network (MWCN), I want to use MWCN as an example of the benefits that come from networking within a networking organization of this sort.

Tomorrow morning, too few hours from now, I am scheduled to meet with a young entrepreneur for whom I serve as a mentor.  I sometimes wonder how much, if any help, I provide to him, but we get together every month for breakfast.  I hope that I serve as an effective sounding board, if nothing else.

This opportunity came to me through a friend, Greg Warnock, who had launched a venturing organization called "Junto Partners," designed to help young entrepreneurs, typically straight out of college, to launch small businesses, especially those that won't require large amounts of capital to reach some meaningful scale.  Greg, an entrepreneur at heart, has been working for the last several years as a venture capitalist at vSpring.

Greg invited to me, along with dozens of other professionals in the community, to support the organization with some mentoring time for the young entrepreneurs.