For Family Firms, Equity Capital Hard to Come By
The company’s name -- Data Systems Worldwide -- may suggest that it has a global presence. But in truth, the enterprise that the Mogavero family runs has been struggling to reach beyond the confines of the San Fernando Valley.
Unable to find the capital needed for expansion, the Woodland Hills-based information-technology provider has faced “a limited future, basically serving clients here in the Valley area,” says Executive Vice President Michael Mogavero.
Indeed, coming up with the cash to grow can be extraordinarily difficult, especially in the current economic climate.
Private equity firms “want to see impossible returns -- 75% to 100% compounded over three to five years,” Mogavero says. And banks, he adds, “offer you an umbrella when the sun is shining and take it away when it rains.”
Data Systems is hardly alone in its frustration. Though hundreds of small to medium-size California companies have received about $95 billion in private equity in the last year, such funding is “non-applicable” to much of the local economic base, says Rohit Shukla, president of the Los Angeles Regional Technology Alliance.
“Many family-owned, private businesses do not meet the criteria for equity investors,” Shukla says.
With this in mind, Shukla’s group has launched a new program to help fill the void. Among its first clients: Data Systems.
The company, which was started 35 years ago by Mogavero’s father, Frank, originally helped small businesses use mini-computers. Later, it assisted clients in harnessing PCs. As years passed, Data Systems linked computers in networks and adapted to the Internet.
By 2000, by distributing computers and software for Sun Microsystems Inc., Microsoft Corp. and Oracle Corp., the company saw sales hit $35 million. And the firm set its sights on further growth.
“We had an idea to build a data center and provide total information services for clients,” recalls company President Phil Mogavero, Michael’s brother.
The family lined up $10 million in venture capital to finance this ambitious step. But within weeks, everything fell apart.
“The market started south and dot-coms came crashing down,” the president says. The offer of venture capital disappeared.
Over the next two years, Data Systems’ annual sales fell to $17 million, and employee rolls shriveled to 60 from 100.
Still, the company adapted and survived. Today, it is building an outsourcing business in which Data Systems employees provide information-management services, saving small companies the need to hire expensive staff to tackle the task. Phil Mogavero says the firm can pare its customers’ information-technology costs by as much as 70%.
Surely, the company is on to something. Outsourcing is a growing business for giants such as IBM Corp. and Computer Sciences Corp. And it holds good prospects for medium-size firms too.
Just ask Patrick Dolan, who in 2000 sold Brea-based Systems Management Specialists Inc. to Britain’s Marconi. Recently, Dolan received $10 million in private equity from Riordan, Lewis & Haden -- a firm led by Christopher Lewis and backed by former Mayor Richard Riordan -- to buy the company back.
The Mogaveros believe that their company should be able to secure as much as $4 million in equity financing, given its $2.8-million backlog in outsourcing contracts and $19 million in expected revenue this year from all its information technology work.
But time and again, they have been rebuffed.
“What some people have told me is that to get capital we need a name-brand CEO,” says Phil Mogavero, who has headed Data Systems for more than a decade. “That is disappointing.”
Enter Shukla’s group, LARTA, a state-sponsored organization charged with spurring high-tech employment. Last year, the group set up Fidelys, a privately funded consultancy designed to help small firms attract capital or joint-venture partners.
Rocky Springstead, managing director of Fidelys, foresees Data Systems allying with a national partner to spread beyond its San Fernando Valley base.
“What I like about the company,” he says, “is its adaptability, the way it has changed repeatedly over the years and invested to build new business.”
Nonetheless, Springstead does not anticipate that Data Systems will win much private equity capital, because its outsourcing arm is small and the rest of its work is under the same cloud that is plaguing much of the high-tech sector.
So his vision is one that splits Data Systems in two: The outsourcing business would merge with a large national company offering the same services, while the distribution arm would ally with other such firms in a national network.
Such a scenario, of course, implies the end of the family firm’s independent existence. But Springstead says a holding company could be set up to control the Mogaveros’ assets. That would give the clan a way to realize the value that should come as a company called Data Systems Worldwide begins to live up to its name.
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James Flanigan can be reached at jim.flanigan @latimes.com.
