AutoXray:  No funding.com

AutoXray had been operating for four years consuming all of its initial seed capital. The EPA had mandated new communication protocols and standards for all new vehicles being manufactured.  AutoXray was challenged with a major upgrade to its technology to keep up with these new changes.  All automotive diagnostic equipment manufacturers were faced with similar retooling to meet the new standards.  This could not have come at a more difficult time and would challenge the tenacity of management to fight for the company’s very survival.

AutoXray experienced difficulty raising second round capitol.  GD Mac evaluated the situation and discovered two major reasons why funding was difficulty. 

First, the original investors were given equity and loans for nearly the full amount of their investments.  These loans sat on the balance sheet creating large debt. This error is common in small companies, the investors negotiate with the entrepreneur to provide equity and loans together as way to mitigate risk. 

This short sided approach only works if the company is producing a lot of cash to pay the loans and the company does not require additional funding.  The loans often cause the balance sheet to have a negative net value. It is very difficult to raise capital unless someone is seeking to assume debt for tax purposes. A plan to move the debt off the balance sheet was devised offering the share holders preferred positions combine with some other conditions favorable to the company.  This plan was not perceived well by investors took months to execute further limiting access to funding efforts.

The second difficulty stemmed from the venture capital community’s exclusive interested in Internet companies.  Meanwhile the president of the company continued venture presentations to no avail as it was the dot.com craze.  Unless a product or company had “dot.com” in their name, there was little or no interest. Not only was Autoxray not a “dot.com” it was an automotive company and suffering from analysts hype of the new world order and “dot.com” euphoria.  Small businesses operating in this lack luster sector were not getting play, period.

AutoXray was forced to bootstrap or face its ultimate demise.  Going out of business was the easier decision, but ultimately, the tenacity of management prevailed.

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