VENTURE CAPITAL IN ORANGE COUNTY : The Investors : Ingenuity Can Keep Both Businessman and Financier Satisfied With the Deal
Zila Pharmaceuticals in Phoenix had struggled for nearly five years to get its over-the-counter herpes ointment ready for mass production.
But the chronically undercapitalized firm had gone through about $600,000 and didn’t have any more money to produce and market Zilactin. And Zila executives didn’t want to give up control of the firm to get it.
Parker Dale, chairman of International Daleco Technologies in Newport Beach, devised an innovative financing scheme that provided Zila with $2.5 million, gave Daleco a 30% stake and gave investors a chance to get three times their money back--starting almost immediately.
In what Dale calls a venture marketing concept, Daleco formed a limited partnership to invest in Zila, with 80% of the funds going into a nationwide marketing effort.
With Daleco as the general partner, the partnership received stock and a 10% commission on gross sales, less production costs, each month. If the product sells, the investors get nearly $8 million back quickly. If it flops, they’re left with their stock.
So far, Zila has paid Daleco more than $97,000 in commissions, and its stock has doubled in price to $1.20 a share, Dale said. The company expects to post $1.2 million in sales by the end of its fiscal year in August, six times the $200,000 in sales the previous fiscal year, he said.
“I’ve never seen anyone else take returns out in a royalty stream,” said Gregory Ross, a partner in the Costa Mesa office of the Arthur Young & Co. accounting firm. “From the entrepreneur’s side, looking at giving up 5% to 10% of revenues is a whole lot better than giving up the company, and it’s better than other kinds of financing, with higher interest rates.”
Dale said the marketing partnership “can totally change a company’s income sheet” and keep the balance statement clean of extra debts because the financing is not a loan or other kind of expense, and returns come out of sales.
One entrepreneur who wasn’t prepared to give up equity in his company had something else to offer venture capitalists for their money.
Steve Jordan owns three Lake Forest companies--Property Recycling, Jordan & Associates and ReNU--that buy dilapidated houses, rehabilitate them and, in some cases, lease them out to individuals or groups who can provide halfway houses for recovering alcoholics, drug addicts or other groups requiring care.
Jordan’s plan is relatively simple. He gives investors equity positions in the houses, not his companies.
“We’ve been able to get venture capitalists interested because the yield is large enough on homes,” Jordan said. “The average investment is $75,000 in a home with a return of 20% a year to investors.”
Some investors want their money back within a year or two, while others are interested in long-term appreciation, he said. Jordan’s companies get an average return of about 35% a year, he said.
