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Last Update: Monday December 18, 2017

Key Idea: Use Other People's Money To Launch And Grow

CFO Louis Baldwin said they went to Wall Street to find early-stage capital to get them off the ground, then they went public so those equity partners could harvest.

Key Question:

A: 

Find the right partners.  Bob and Steve used their connections to get to the former Secretary of treasury, Robert Rubin.  He raised $35 million for XTO in three hours and the new business was off and running. This does not happen often.  It only happened here because Bob and Steve had a proven track record and plenty of friends in the financial community.

Most experts agree that the main failure in business is under-capitalizaion. It is part of the triad that keeps small businesses small: markets, money, and management. One of our goals as a television show is to open up the discussion about capital. If the banks only loan $9 out of every $100 to small business, we need to know all our options (besides bootstrapping). One of our weakest links is in the area of equity financing.

Other People's Money should engender the same respect as your hard-earned cash. If you have big plans for growth and your business is sustainable beyond your involvements, and you are sure that you require a substantial infusion of cash to your business, consider equity financing. Equity financing means you are actually selling a portion of your business for a price based on what the value of the business will be after you use the proceeds from the sale of your stock to achieve your business plan.

Q: What kind of equity financing is available to a small business owner?

A:
As with bank financing, there are a variety of different sources of equity financing. Venture capitalists, angel investors, qualified investors, and the general public all invest in small businesses. To seek equity capital, you'll have to prepare some sort of offering memorandum. You are offering to sell your stock at a certain price. The offering memorandum will include your business plan, financial information, anticipated use of proceeds, and the risk factors to the investors. Both the form and content of offering documents are regulated by Federal and State securities laws.

Q:
How does a small business obtain equity financing?

A:
You will have to prepare a written document that tells your story effectively and in great detail. If you are successful, much of what you write may well be incorporated in an offering document. Get working on that document, and begin weighing the "costs" of each type of equity partner. All but the SEC's SCOR, a private placement memorandum, requires what are known as qualified investors. The most expensive is the initial public offering on a securities exchange like the NYSE (Wall Street) or the NASDAQ.

It all depends on how much money you need and how the stock in your company will be marketed. Whether or not you will be successful is dependent on the soundness of your business idea, the strength of your management team, the size of the target market and your ability to capture that market, the all important numbers and potential return on investment, and, of course, the risk factors. If you believe you can excel in each of these areas and you pound on enough doors and make enough telephone calls, you will find the OPM you need.

After they established the business and had a track record of success, XTO went public. We suggest going public with your eyes wide open. It's not easy and changes entirely the way you do business.

If the upside of "going public" is that you get a huge infusion of capital, what is the downside?

A: You no longer own the company and you must comply with extraordinarily complicated rules put in place by the SEC (Securities and Exchange Commission). Just the process of going public can cost in the hundreds of thousands of dollars and often well over $1 million. These dollars go to the investment bankers, the attorneys, the CPAs, and to "investor relations" (marketing/public relations) people who will polish up your image to present you to investors.

Q: When would an entrepreneur need to go public?

A: When the idea has the potential of capturing a large group of customers. Keep in mind that Bob and Steve worked in a public company and they had been through a hostile take over, so they knew what they were in for. Also, everybody in this industry knows that the oil business requires huge dollars up front. Very few individuals drill for oil with only their own money.

Think about it

Do you have big plans that require big bucks to turn your dream into a reality? Could you give up part of your business to make that happen?

Clip from: XTO Energy (aka Cross Timbers)

"I'll be back."

Fort Worth:  Remember when oil was $9 per barrel?  Bob Simpson and Steve Palko do.  They founded Cross Timbers Oil & Gas in Fort Worth at the same time others were getting out of the business. These two visionaries with a long range plan  teach us all what it means to take calculated risks.

Palko was the  VP of Engineering for Southland when there was a hostile take over of the company.  As a reminder to everyone in their newly-formed venture, one of the first things he did was to buy the "I'll be back" bronze (above).   And, surely, they did come back with a vengeance!

Today, know as XTO Energy, the business has quickly grown out of the ranks of a small business, but we believe the spirit of small business will permeate this business forever.  These people dream the impossible dreams then turn them into multi-faceted realities with deep-seated values.

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XTO Energy, Inc.

Gary Simpson, Senior Vice President

810 Houston St.
Fort Worth, TX 76102-6298

Visit our web site: http://www.xtoenergy.com

Business Classification:
energy, oil and gas

Year Founded: 1986

Use Other People's Money To Launch And Grow

BOB: In any business, there are many roads. You know in our business, you can go to Mexico, Texas, offshore. There're just all kinds of variables that you can choose. And what we chose is what we knew and had learned in our prior career, that we want these basins -- Texas, Oklahoma and New Mexico -- really long-life properties.

HATTIE: And somebody else doesn't want them.

BOB: And somebody else thought it was all over. So what we do is take our talent and look for the missed nuggets. And we've been very successful at that. But what you get in our strategy is lesser risk than drilling a wildcat. And, as it turns out, there is virtually no risk in an otherwise -- depending on your strategy -- very risky business. I mean, you can be broke in a hurry in this business. So what we've done is take a strategy which, in our minds, is failure-proof and then make it better. And so we were able to pause in hard times because we had a strategy that would not put us out of business.

The most likely way you'll fail is if you're not properly capitalized . . . you have a good idea with no staying power. It's just like anything in life whether you're in the market or in commodities or in a business, capitalization is probably the killer issue.

HATTIE: Staying power -- where does that come from?

BOB: Staying power is both your will and again, your financial resources. You know, don't get out there too far if you can't afford to be there. If it's a 50/50 idea, don't just get one swing at the bat; you need two.

HATTIE: Why did you go public?

BOB: I would say we didn't have a choice. If you go back and look at our background, this particular one, our godfather's Bob Rubin, former Secretary of the Treasury. He raised the seed money in a couple hours, $35 million. And that group of people wants to liquefy or harvest.

HATTIE: They want to cash out.

BOB: In five years. We were in our sixth and then our seventh. So from our viewpoint, we could either sell the company and harvest or go public and let those people harvest. And so the initial decision was, `Which would you rather do?' And obviously we wanted to continue the company. This was a right answer for both parties.


HATTIE: Louis Baldwin is chief financial officer and talks about going public.

LOUIS BALDWIN: We felt like that was the best way to maximize the value for our investors.

 HATTIE: For the other investors, the private investors.

LOUIS: That's right. And we were a private investor, just like we're a public investor now. Oil and gas is not a growth business. Oil demand in the US goes up about 1 percent a year; gas, 2 percent or 2 1/2 percent a year.

HATTIE: Why did you start a business in an industry that isn't growing?

LOUIS: It's what we knew how to do. And I would say that most of the people that are starting businesses or are successful are doing what they know how to do. And if it's a growth industry, that's great. But you can be a successful start-up and growth firm in an industry that doesn't have a lot of underlying growth. If you can determine what niche of it you want to play and you've got a good plan, you can grow.

We started with eight employees of Cross Timbers. We went public in '93 with about 40 million barrels of oil reserves. With four years we're close to 200 million barrels. So somewhere in there, we were growing. And the real hard part is not only to grow but to grow profitably -- to make sure that you're making money for your investors, not just getting bigger by issuing more stock -- and we've done that.

HATTIE: Louis' daughter, Laura, wrote her undergraduate thesis at the University of Texas on what she saw her father living through, "The Decision To Go Public and the Initial Public Offering." In the introduction, she says, `There are only two reasons to go public: to raise capital and to provide liquidity to selling shareholders.' She also points out that the process is complicated and expensive and should only be undertaken when the company can demonstrate clear growth potential.

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