While desperation comes easily to many technology companies these days, capital doesn't, and that simple fact may start driving publicly traded firms back to the private equity markets in search of cash infusions that can keep them in business.

It may be ironic that investors now shun the companies on which they once bestowed outsize valuations, but it's no joking matter to firms seeking cash. Without the cash flow to service debt or the growth rates to tap the public markets, tech companies may begin turning increasingly to hedge funds, buyout funds and other private deals, investment bankers say (and surely hope, as their underwriting businesses evaporate).

And while most individual investors can't get in on the deals -- they're not registered for sale with the Securities and Exchange Commission and primarily are peddled to strategic and institutional investors -- following the lead of sophisticated funds can show which companies have valid business models and help target potential survivors of the market's jihad against the New Economy.

"Public technology and Internet companies are aggressively seeking capital in the private markets," says Phil Harris, a managing director at Alterity Partners, a New York boutique investment bank specializing in technology companies. "We tell them they have three paths: 'You can sell yourself, raise capital or go out of business.' "

Make no mistake, the market for private placements has cooled considerably, primarily because buyers and sellers are unsettled by the market's volatility. In 2000, companies raised more than $21 billion in private placements, three times the amount raised in 1999, according to PlacementTracker.com. So far this year, just more than $1 billion has been raised.

The Shift

Private placements -- sometimes called private investments in public equities, or Pipes -- can tap either strategic investors or make deals with hedge funds and other investors looking for more speculative investments. The shares sold can be either common stock or some type of convertible instrument with both a debt and equity component. Another type of private placement provides an equity line of credit that can be tapped at various stock prices, a structure sometimes labeled toxic by issuers, because it can excessively dilute shareholders' equity and weaken already troubled stocks. But investors who fear the market's unpredictable waters may demand the type of protection such a structure offers.

"Volatility is a real concern," says Harris at Alterity Partners. "Nobody wants to put money in a company and see their investment fall the next week. Right now, it's a moving target."

Mail.com (MAIL:Nasdaq - news) last week raised a total of almost $6 million by issuing convertible notes to money management firm Zesiger Capital Group and 3 million shares of common stock to Federal Partners, a private investment fund. (Federal is an investment arm of Clark Estates, which holds TheStreet.com (TSCM:Nasdaq - news) shares for company co-founder Martin Peretz and his family.) With Mail.com stock that has fallen from a 52-week high of $21 to about 88 cents, the buyers want more than an equity slice.

The convertible notes, which mature on Jan. 8, 2006, carry a 10% coupon payable semiannually. Half of the interest payments will be paid in Mail.com common stock valued at a price determined by calculation of the share price until 18 months after the issuance date.

Logging On

"I think we'll see more rescue Pipes" that companies use as bridges to develop their businesses, says Steve Pagliuca of leveraged buyout firm Bain Capital.

Companies also may opt for private placements because the deals don't require filing with the SEC. "Filing a registration statement can crush the stock and, today, doing that would mean little institutional interest," says Clark Callander, the global director of private capital markets for the Robertson Stephens unit of FleetBoston (FBF:NYSE - news).

In this less-public way, issuers aren't subject to the whims of the public market and don't flaunt the dilution of the stock in the face of current shareholders, though this means investors may need to watch out for deals such as this.

A Benefit to the Decline

"If they believe in the opportunity the company has and believe the company is a victim of the market" existing investors won't hesitate to jump back in, he says. The only requirement these days, he says, is that companies are on that oft-mentioned but little traveled path to profitability.

Robby's Callander says deals will start to happen when buyers see "stable stock prices" and companies that are "fairly valued ... to their peers."

The tradeoff may be some control. "Few end up being control transactions, but the leveraged buyout-fund sponsors may seek some governance and protection," says one New York investment banker who requested anonymity. "Right now, there are a lot of guys interested in private placements in tech companies as a kind of vulture investing."

Issuers are wary of the structures they choose, the banker says, so they "don't do a deal that's infinitely dilutive." Their choices can be limited, he says. "The terms depend on how distressed the situation is."