Women Entrepreneurs and Growth Capital

From Money Matters
by Molly Tschida Brennan, in NAWBO's Entrepreneurship Trilogy

As you begin to think about growing your company, remember there's no right or wrong path to follow. Each business has unique characteristics and goals, meaning no two will approach growth in exactly the same way. And there are nearly as many ways to grow a business as there are businesses themselves. Maybe you're looking to penetrate a new market, for example, or add a new product or service, or buy a new facility. It could be you're expanding overseas, or thinking about acquiring a competitor's business. Or possibly you've landed a big client and simply need working capital to fulfill the contract. Or maybe you aren't sure what your plans are, but think your business has the potential for more.

Indeed, the only commonality among growing companies is the reality that growth doesn't happen on its own. Business owners make a conscious decision to stretch a little farther, demand a little more, and push a little harder. It's a challenging endeavor--for both the company and its owner--and to do it right requires careful planning and preparation. Poorly planned growth can wreak havoc, or worse.

So before you start down the road to growth, you need to make sure you're prepared. You need to anticipate the challenges growth will present, and know how you'll respond to them. First and foremost, that means understanding the financial tools that can help you achieve your goals. In the following chapters, we tell the stories of women entrepreneurs who used different financing mechanisms to fund their growth.

By sharing their experiences, along with advice and insight from some of the country's foremost experts on business finance, we hope to de-mystify financing options, and help you determine what source of capital is best suited to your needs. It's important to note that this book is not an exhaustive guide to financing growth, but rather the next lesson in your ongoing education. The aim is to give you the tools and knowledge necessary to analyze your own capital needs and financing options. Read on to for your first lesson in positioning your business for growth.

Case Study

Lopez Garcia Group
, Dallas, Texas 

Wendy Lopez,  Founder and CEO
Year launched: 1988

The male-dominated engineering industry is not typically thought of as fertile or even hospitable land for women entrepreneurs. But Wendy Lopez is not someone who is easily discouraged, nor readily pigeonholed. And so this woman of Hispanic origin, the child of parents with grade-school educations, decided in her teens that engineering was her career of choice and entrepreneurship her vehicle to success. Today, as CEO of the Dallas-based LopezGarcia Group, Lopez oversees a multidisciplinary engineering and environmental-planning firm with nearly 200 employees spread among nine offices in three states. Her company has been recognized as one of the fastest-growing engineering firms in the country, and as one of Dallas-Forth Worth's leading growth companies.

It's a long way from the one-woman engineering shop she opened in 1988, yet Lopez is neither surprised nor impressed by her own success. She has a relaxed nature and an easy confidence about her, and is matter-of-fact about the steps it took to get the LopezGarcia Group where it is today. Those steps included landing more and bigger clients, using her women- and minority-owned business status to access government contracts, acquiring another firm, and, finally, merging with a competitor. While the methods varied, her willingness to grow her company and her openness to business opportunities was constant, even when it meant treading into the unfamiliar waters of business finance. "I knew engineering," she says, "but a lot of this business stuff I was learning on the fly."

But Lopez proved a star student. In 2004, she was named the NAWBO Woman Business Owner of the Year, and was honored as a "Rising Star" by the Business Women's Network. Previously, her company was recognized as Employer of the Year by the Women's Transportation Seminar, and was cited as one of the top 50 women-owned firms in the Dallas-Forth Worth area.

Her start, however, was much more modest, and not nearly so high profile. After receiving her undergraduate and graduate degrees from the University of Louisiana, Lopez landed a job with a Dallas engineering firm. After only a few years, the company decided to close its Dallas offices, and Lopez had to decide if she would move with the firm to Fort Worth. It was the nudge she had been waiting for, and the decision was easy. "I had always thought I would own my own business someday," she says, "and so I said to myself, 'You're almost 30. Now's the time to do it.'"

And with that, Wendy Lopez & Associates was born. Of course, the "& Associates" was more for show than anything else, because for more than 18 months it was just Lopez--no associates, no employees, and nobody to share the task of starting and growing a business. Eager to generate revenue, but aware that her company wasn't large enough or well-known enough to land major contracts of its own, she decided she would focus on the plentiful subcontracting work doled out by the area's larger engineering firms. (These "prime" contractors receive contracts directly from municipal and government clients, then subcontract a good portion of the work to smaller firms.) Lopez also knew that, as a minority and woman business owner, she could qualify for contracts targeted to those owner groups. So she spent her days making connections and marketing herself to larger engineering firms, and her nights working to complete the jobs she landed.

The strategy paid off, and by the early-'90s Lopez had 42 employees and nearly $500,000 in annual revenues. She was going after bigger and bigger jobs, which kept the firm on its growth trajectory, but also meant a single late payment could cause a major cash-flow crunch. And because municipal and governmental clients are notoriously slow in paying, Lopez faced those crunches more than she would have liked.

Often, she had bills and employees to pay but weeks and sometimes months before she would see reimbursement from a client. Very quickly, she learned that such cash-flow shortages are endemic to growing businesses, and that underestimating their significance can be fatal. "When you're growing really fast, your cash can't keep up with it," she says. "On paper you're making a ton of money, but in reality you don't have any cash."

Because of this formative experience, having a rainy-day cash fund became central to Lopez's business and growth strategy. In the early days, Lopez relied on a credit card to pick up the slack between her accounts payable and accounts receivable; later, she obtained lines of credit. These tools helped her juggle and eventually balance her cash demands, and as a result the company thrived. Soon she decided it was time she went after a few prime contracts herself, and in 1994, she applied for three big ones at once. Much to her surprise, she got all three--in the same month.

At first, the challenge seemed daunting: There were new employees to hire, additional services to contract, and bills that had to be paid in order to fulfill the contracts. For many companies, the strain would have been too much. But because Lopez had the foresight to secure a line of credit before she landed the contracts, she was able to ramp up staff and make all the other necessary adjustments without a cash-flow shortage. Had she waited until after she secured the contracts to explore financing options, she could have fared far worse. Not surprisingly, she advises other business owners to think proactively about their cash-flow needs. "Get as much as you can," she says. "And get it when you don't need it, because when you need it, you might not be able to get it."

Over the next five years, Lopez continued to build her business in the Dallas area. Then, in 1999, quite by accident, Lopez came upon an opportunity to buy another, out-of-state company. She was interested in an Army Corps of Engineers contract in New Mexico, but had to team up with a local company to be eligible for it. One of the companies she randomly called mentioned that the firm was for sale, and might Lopez be interested? Indeed she was.

She flew to New Mexico to learn more about the company's operations, contracts, and business potential. The firm specialized in land-development engineering and dam-foundation studies, and Lopez determined that Wendy Lopez & Associates would benefit from that additional expertise and contracting ability. She used her company's profits to purchase the firm's contracts and existing relationships. Now she was running a multi-state firm.

By 2002, Lopez & Associates had 110 employees and a strong, carefully built reputation within the engineering industry. Lopez had achieved growth of about 15 percent each year, and was now able to offer a wide array of environmental and engineering services. It was more than she could have imagined back when she launched the firm in 1988, but still, she had her sights set on more. She thought that with additional expertise and services to offer clients, she could land an even greater number of prime contracts.

Meanwhile, one of her chief competitors, Fort Worth-based Garcia & Associates Engineering, was thinking the same thing. Lopez had an advantage when it came to environmental science and planning, while Ray Garcia was stronger in highway work. Rather than continuing to battle against each other, the two decided to merge their companies and create one full-service, multidisciplinary firm.

The merger was handled through a simple stock swap among the two companies' principals, and in that one deal, Lopez achieved her five-year growth goal. The combined staffs totaled more than 200 people in seven offices, which they've since grown to nine. The new LopezGarcia Group offers civil, environmental, mechanical, electrical, structural, and geotechnical engineering, along with environmental planning and cultural-resource studies, surveying, and construction management and inspection. The firm's target market is municipal and government agencies that have needs in the aviation, surface transportation, transit, water and wastewater, and environmental areas. About 40 percent of its contracts are prime consulting work.

When asked if she ever looks around and wonders how she got where she is today, Lopez laughs and responds: "Every day! When I first started this business, I never thought it would be 200 people. I thought maybe I'd hire a technician to help me out, and then maybe if I got big enough, I could hire somebody to answer the phones." Lopez didn't set out to build an engineering empire, and yet the evolution from one-woman shop to multi-state firm with 200 employees was a natural one. The relative ease with which Lopez achieved this phenomenal growth has as much to do with her business concept, model, and market as it does with Lopez herself.

At numerous points in her career she could have decided that the view from the current perch was adequate, and that her business strategy would be to maintain the status quo. But Lopez was never very good at the status quo. When opportunities arose, she couldn't keep herself from going after them. Granted, the opportunities she pursued were smart and sound, but they weren't without risks. Any time a business moves out of its comfort zone and into unfamiliar territory, it's something of a gamble. Yet time and again Lopez decided that the reward of growing her business was worth the risk, and so she embraced the challenges every opportunity presented.

What the Experts Say

There's a saying that if your business isn't growing, it's dying. Successful women entrepreneurs like Lopez understand that growth isn't a strategy you turn on and off as you need it. Rather, it's a central tenet of a company mission, a driving force behind all business decisions, and something that's forever on the mind of the competitive business owner. That's not to say that a company should expand for the sake of expanding, or never move out of a growth phase. It simply means that committing to growth means having both the vision to spot opportunities when they arise and the confidence to pursue them.

Throughout this book, we profile business owners like Lopez--entrepreneurs who embrace growth and aren't daunted by its challenges and inherent risks. These women are prepared for the possibility of growth, and are able to respond quickly and efficiently when opportunities arise. They know their markets, their own capabilities and limitations, and, most important, the resources available to help them achieve their goals.

As you begin to think about your own growth plans, keep this lesson in mind: Understanding the financial tools at your disposal is critical, because educating yourself about sources of capital is the fastest way to position your business for growth. Companies that don't have a grasp of the various sources of capital--or, more important, how to access them--may be caught flat-footed when something good comes along. Similarly, business owners who don't have their eyes open to the full range of financing options may dismiss opportunities as beyond their reach when in fact they're more than attainable. Worst of all, a company that pursues the wrong source of capital, or chooses a financing tool based on erroneous information or miscalculations, could very quickly grow itself right out of business.

To help you avoid these pitfalls and mistakes, this book will provide an overview of the various sources of capital, and help you match the right one to your needs. Even more importantly, it will offer practical tips to help you secure the financing of your choice. By sharing the stories of successful women entrepreneurs, we hope to take some of the mystery out of the money. Before you begin your close-up examination, however, you need a general understanding of the current financial and business landscape.

Hear Me Roar

If ever there were a time to be a woman business owner, it's now, our experts say. Women are starting and growing companies in record numbers, and as a result are gaining ground and favor with the corporate world like never before. "The financial community is now awakened to the power of the women's business market and is more likely to be wooing them," says Julie Weeks, executive director of the National Women's Business Council.

Indeed, the power and potential of women-owned firms is hard to deny when you consider these statistics from the Center for Women's Business Research: There are 10.6 million U.S. businesses in which a woman or women own at least 50 percent of the company, and 6.7 million in which a woman or women own a majority of the company. The 6.7 million majority-owned firms employ 9.87 million workers and generate $1.19 trillion in annual sales.

The number of women-owned businesses grew by 23 percent between 1997 and 2004, compared with 9 percent growth of all U.S. businesses during the same time period.

And that's just the beginning. Literally. According to the 2004 NAWBO membership survey, sponsored by OPEN: The Small Business Network SM from American Express, expansion is a top priority for NAWBO members, more than 40 percent of whom plan to grow their businesses into new markets in 2005. Similarly, a 2004 survey by the Center for Women's Business Research found that expansion is the top goal for women owners of $1 million firms. What's more, a whopping 87 percent of respondents to a survey by the Women Presidents' Organization said their businesses are currently growing, while another 83 percent said they're optimistic about their future growth and success.

Clearly, a great many women-owned businesses are thriving, and much of that can be attributed to increased access to capital. NAWBO members, for example, are acquiring business capital at higher rates than at any other time in the past. More than 90 percent reported using at least one source of capital in the past 12 months, compared with 83 percent in 2002. Meanwhile, the Center for Women's Business Research reports that two-thirds of the women currently seeking expansion capital were completely successful in their previous efforts to obtain capital, while almost three-quarters (72 percent) of women who expanded their businesses achieved or exceeded their target goals.

Still a Long Way to Go

While these results are encouraging, there is another side of the coin: A great many other women entrepreneurs still face challenges when it comes to obtaining growth capital. While the 1973 Equal Credit Opportunity Act prohibited discrimination in credit access on the basis of sex, and the 1988 Women's Business Ownership Act amended that to include business loans and prohibit lenders from inquiring about marital status or a spouse's occupation, many in the financial community still let gender influence their decisions, Weeks says. "You still hear a lot of stories of women saying, 'On paper, I look just as good as the guy down the block, but they're not giving me the money,'" she says. "There's still this sentiment that 'she's not going to be as serious about this,' or 'she doesn't have the desire for growth that a man might.' There's a lot less of that than there used to be, but it still exists."

That may partly explain why women are less inclined to seek outside sources of financing to fund growth. For example, nearly 60 percent of NAWBO members list business earnings as a preferred source of capital, while according to the Center for Women's Business Research more than 80 percent of women owners of $1 million firms intend to use business earnings as a source of capital. What's more, only about half of the women who own $1 million firms use business or commercial bank loans or lines of credit, compared with 70 percent of men who own $1 million firms.

Of course, there's not anything wrong with avoiding outside sources of capital if that's your preference. Just ask Liz Elting, president and CEO of New York-based Transperfect Translations, a translation and language-services firm. Over the past 12 years, Elting has grown her business from a two-person operation run out of a graduate-school dorm room to a multinational, multimillion-dollar firm. And she's done it all with almost no outside financing. "I just don't like debt," she says. "Instead, I've taken the attitude of 'I'll work with what I have.'"

What that means is avoiding extraneous expenses--the company recently bought new office furniture for the first time--and being as strategic as possible when it comes to controlling costs. For example, Transperfect has a policy to promote from within, thereby fostering employee loyalty and avoiding the expense of recruiting, hiring, and training highly compensated senior management. The company also emphasizes relationship building and revenue generation above all else. It seems to be working, as the company has maintained profitability throughout its 12-year history. "We don't do things until we can afford to do it on our own," Elting says.

But that's not the same as avoiding growth. In fact, in 2000 Elting's company was recognized as one of the fastest-growing privately held companies in the country, when it made the Inc. 500, an annual list published by Inc. magazine. And Elting is anything but a shrinking-violet business owner. In 2001, she received the Ernst & Young Entrepreneur of the Year Award; three years later, she was recognized as Woman of the Year by American Express and Entrepreneur magazine.

It Comes Down to Education

In the end, Elting made a conscious decision to avoid external sources of financing. For many other women entrepreneurs, that determination is much less deliberate. "It sounds almost too simple to be true," admits Sharon Hadary, executive director of the Center for Women's Business Research. "But I think that women need to be educated in the various types of financial tools and instruments that are available to them."

In fact, while some members of the financial community believe women entrepreneurs are more risk-averse and less ambitious than their male counterparts, the truth may be quite the opposite. "Women tend to get stuck at a certain level of growth," says Susan Preston, a Seattle attorney, co-founder of an all-women angel investor group, and entrepreneur-in-residence at the Ewing Marion Kauffman Foundation. "But I believe the vast majority of women have a desire to grow their company to the next level. They just don't know how to do it."

It's a Two-Way Street

Books like this one can help fill the education gap, but women also need to seek out the advice, guidance, and partnership of the lending and investing community. "Women business owners need to become more sophisticated and more confident in their dealings with the financial community," says Jayne Huston, executive director of the National Education Center for Women in Business at Seton Hill University outside Pittsburgh. "They need to negotiate, they need to ask questions, they need to partner and ask, 'How can you help me? How can we take this to the next level?'"

Tapping into the knowledge and resources of the financial community is key
to future growth and success, Hadary agrees. "I think that one of the things women have not done well in the past is make their financial adviser, banker, or investor a partner in their business planning," she says. "As I talk to groups of women business owners, time and again what separates the larger and fast-growing businesses from the rest is the fact that they have a relationship with these advisers."

Just remember, Weeks says, a relationship is about more than opening a checking account or applying for a line of credit. While many financial-services firms are currently developing programs for women entrepreneurs, they're not necessarily helping them achieve the growth they aspire to. "They're getting them in the door, but then they're kind of forgetting about them," Weeks says. "The financial community needs to think more proactively about women and their businesses, and not pigeonhole them into outdated stereotypes.

Instead of saying, 'Here's a credit line for $20,000,' they should be saying, 'Why don't we increase this to $100,000 and see what you can do then.'" Weeks continues: "I think we're entering a phase where the operative phrase would be 'Meet me halfway. Women-owned businesses, and the organizations that represent them, need to come together and say, 'We're educating ourselves about the financial tools and options. Why don't you, the financial community, help us?' I think that's how we will achieve true growth and success."

Unleash Your Full Potential

Once women have a full understanding of the resources at their disposal, a good many may decide that, like Elting, they prefer to fund growth without outside financing. But until they know the full range of mechanisms, they won't be able to make a truly educated decision about their expansion plans. Indeed, women's avoidance of certain sources of capital, and their apparent disinterest in certain levels of growth, may have more to do with a lack of understanding than an aversion to risk. "Once they know these other things are out there if they want them," Weeks says, "you'll see an awful lot more women say, 'I never knew that was a possibility. Let's try this.'"

Whether you're just starting out, just hitting your stride, or just now sitting back and enjoying your success, it makes sense to educate yourself about the various financing options available. Even if you're not currently thinking about growth, understanding what capital is and how it works will help you spot and pursue opportunities as you come across them.

That preparedness and openness to the possibility of growth will keep you and your business energized and sharp, says Beverly Inman-Ebel, founder and CEO of TLC, Talk, Listen, Communicate, and NAWBO's 2004-2005 president. Inman-Ebel's Chattanooga, Tennessee-based company is 23 years old and doing just fine, thank you.

Yet Inman-Ebel is out there exploring financing options and considering different routes to grow her business. Like Lopez, she recognizes that even the most successful and stable companies need to continue evolving, both to maintain their market position and to keep their competitive edge. "My business is very stable and not in debt," Inman-Ebel says. "At my age, you look around and say, 'Do I really want to go into debt again?' And my answer is yes, because I want to get re-excited about my business. If you really want to get excited about your business and what you're doing, you need to take the risk and grow it."