Ask Your Lawyer For Capital Intros
No Bank Loans? Credo Tried EDA
March Venture Fair: Entries Please
Corrections or additions?
These articles by Michael Schumacher and Barbara Fox were prepared
for the January 24, 2001 edition of U.S. 1 Newspaper. All rights
reserved.
Venture Capital: Outlook for 2001
The boom days of venture capital investments could be
on the decline here in New Jersey and across the nation according
to industry experts who predict a return to more conservative
investment
strategies. That would mean a sharp downtrend from the record
investments
seen this past year, when a projected $100 billion was entrusted to
entrepreneurs nationwide in hopes of obtaining huge returns. While
year-end figures are not yet confirmed, it’s projected that New
Jersey-based
companies received in excess of $2 billion last year for startups
or growth companies. If predictions for 2001 VC spending are accurate,
that figure could be lopped in half.
This projected decline is not necessarily a bad thing, says Jay
Trien, president of the Venture Association of New Jersey.
“There
will be a lot less `dumb money’ out there now,” he says, referring
to the huge amounts of money that had been thrown into high tech and
dot com enterprises in the past, much of which didn’t produce the
anticipated returns due to inadequate prior research. “People
assumed that the money would continue to be thrown at deals. Now it’s
a return to traditional due diligence in determining investments,”
says Trien.
“Venture capital investments in 2001 will be more reflective of
1999 spending,” says Mark Heesen, president of National
Venture Capital Association (NVCA), headquartered in Arlington,
Virginia.
“People are more cautious. Dot com mania is over, and it takes
a lot faster to catch the wave. Venture capitalists today are stepping
back and asking more questions. It’s really a process that we’ve
always
had,” says Heesen.
“We’re not going to have high returns this year, but they will
still be healthy returns,” predicts Heesen. He will be the
luncheon
speaker at New Jersey Technology Council’s annual Capital Conference
on Friday, January 26, at 8:30 a.m. at the Princeton Marriott. Cost:
$160. Call 856-787-9700. The conference is expected to attract CEOs
and senior management from companies in all stages of growth, as well
as venture capitalists, investment bankers, and others interested
in participating in the expansion effort through capital investments.
Heesen says that one reason for the downturn in reduced venture
expenditures
will be the need for investors to spend more money strengthening
existing
investments. Therefore, Heesen maintains, more than ever before,
entrepreneurs
need to create the best business plans possible, with excellent
management
teams in place, with evident indications for good revenue streams.
Investors are looking for companies capable of going public.
The good news for New Jersey is that industries based here remain
appropriate targets of venture capital funding. “The venture
capital
industry has been the primary catalyst for the explosive growth of
the high tech and biotech industries in the United States over the
past 20 years,” says Heesen. “I think that biotech is one
area that is actually ripe for growth in 2001, unlike other areas
of venture investing, which likely will decline from the record levels
of 2000.”
Heesen holds a law degree from Penn State and a B.A. in political
science from Duquesne University in Pittsburgh, Class of 1980. He
has been associated with NVCA since 1991, serving as president since
1999. After the Capital Conference, Heesen will lead a VC and Equity
Sources Forum at 2 p.m.
In his luncheon speech, Heesen will review venture capital figures
for 2000, as well as discuss policy issues that face both
entrepreneurs
and venture capitalists this year, and the position NVCA is taking
on them. They include:
Policies fostering capital formation . The perennial policyissue for the venture capital industry is the capital gains tax.Simplystated, if the rate is raised, the amount of investment shrinks; ifit is lowered, investment increases. NVCA will continue to approachpolicy initiatives from the perspective of their impact on capitalformation.Accounting standards . Proposed rules governing accountingtreatment for business transactions and financial tools continue togenerate controversy. The Financial Accounting Standards Board (FASB),an independent regulatory body overseen by the Securities and ExchangeCommission (SEC), is moving forward with an effort to eliminatepoolingaccounting for business combinations. In addition, the InternationalAccounting Standards Committee (IASC), an advisory body made up ofrepresentatives from FASB and other foreign accounting standardsboards,has issued a paper calling for the expensing of stock options.Education/worker training issues . NVCA will advocate policiesthat expand the opportunities and efficiency of worker trainingprogramsas well as more fundamental education reform.Stock options & ESPP legislation . One bill that NVCA willsupport lets employees who have been granted stock options to delaytheir tax obligation from the exercise date to the date they sellthem. This legislation is aimed at encouraging more retirement savingby rank-and-file workers through tax-qualified stock options. Anotherbill NVCA supports would provide certain tax advantages to expandthe use of employee stock purchase plans (ESPP).ERISA Reform . As a result of subcommittee hearings,legislationwas introduced to modernize the Employee Retirement Income SecurityAct (ERISA). Work on this legislation, which contains certainNVCA-recommendedprovisions, will continue this year.Hart-Scott-Rodino reform . The Hart-Scott-Rodino AntitrustImprovements Acts of 1976 was designed to give the federal governmentthe opportunity to review mergers, acquisitions, and other businessconsolidations prior to a deal’s completion. This would ensure therewas no risk of creating a monopoly as a result of the new organizationbeing created. One of the criteria for having to file (there’s a$45,000filing charge) was that the size of the business needed to be $15million in assets or more. The revised bill raises the business sizeto $50 million. While this will provide certain critical relief tothe venture capital and entrepreneurial communities, additionallegislativereforms may be pursued in the new Congress including redefining thedefinition of “passive” investor and the elimination of filingfees.Business process patents . Policy makers are trying todetermine if certain software enabled business process patents, suchas Amazon.com’s patent for its “One-Click” website feature,pose a threat to E-commerce or if they protect ingenuity and forcecompetitors to develop alternative — and better — businessprocesses.Privacy . Online privacy will dominate the high tech policyagenda next year. Privacy advocates are seeking strong limits on thecollection and use of online data. Two main issues will be ofinterest:online privacy regulations and database protection. NVCA will advocatepolicies that assure the growth and will not impede the promise ofthe Internet and E-commerce.Embryonic/stem cell research . Some 1996 legislation, whichis renewed annually, bars federal funding for research that destroysembryos. The importance of this issue has been heightened by recentbreakthroughs in harvesting and using stem cells. NVCA advocatespoliciesto expand research in this area.”Events such as NJTC Capital Conference 2001,” saysTyrone Williams , one of the conference panelists, “provideentrepreneurs with the tools to prepare themselves for the equitymarkets and enhance their ability to obtain capital.” Williamsis the manager of the Technology Financial Services and ConsultingGroup at First Union National Bank, which has a regional headquarterson Scotch Road in West Trenton. “Businesses seeking capital,”he says, “need to understand the importance of having aneffectivelywritten business plan, having the ability to articulate one’sstrategy,and having the right group of advisors, as well as understanding thevarious channels of financing alternatives and the differences betweenthem. Without access to capital, the technology revolution would neverhave happened or continue to grow.”— Michael SchumacherTop Of PageAsk Your Lawyer For Capital IntrosAs a young firm, you can hire a capital consultant andpay a percentage of the funds you get, but you can also lean on yourlawyer or accountant to beat the bushes for you. Some law firms doget very involved in matching their clients with funding sources.”To compete effectively with the Bay Area law firms, we don’twait for people to come to us with a deal, we help young firms accessthe dollars and open the doors,” says Victor Boyajian, talkingabout the services that Sills Cummins offers to midcap and youngercompanies. A graduate of the University of Rochester, Class of 1982,he went to law school at the University of Pennsylvania and joinedthe firm with 175 lawyers in Newark, District of Columbia, Manhattan,and Palo Alto.Boyajian is helping the Credo Group on Alexander Road find funding(see story below) and is speaking at the New Jersey Capital Conferenceon Friday, January 26, at 9:35 a.m. at the Princeton Marriott. JanLeschly, CEO of Care Capital LLC at Princeton Overlook, will givethe opening keynote at the Capital Conference, followed by Boyajian’sworkshop/panel sessions and two other sessions. Cost: $160. Call856-787-9700(www.njtc.org).Boyajian’s panel is titled “Ten Sure-Fire Ways to Attract EarlyStage Venture Capital” moderated by Gerard S. DiFiore ofReedSmith LLP at Forrestal Village. The other panelists are JimGunton of NJTC Venture Fund and John W. Reynolds of KemperVentures at Forrestal Village.The moderator for “What Exit for NJ Technology Companies? M&A— Counting the Deals on the NJ Turnpike,” also at 9:35 a.m.,is Christine M. Marx of Duane, Morris & Heckscher LLP at ForrestalVillage. Among the panelists is Gregory H. Olsen of SensorsUnlimited at Princeton Service Center.At 10:40 a.m., the second set of panels begins. “Where to Go Whenthe VCs Say No: Alternative Financing Techniques for Starting andGrowing a Business” is moderated by Kenneth M. Van Deventerof Riker, Danzig, Scherer, Hyland & Perretti LLP in Trenton. JohnTesoriero of the New Jersey Commission on Science & Technologyis among the panelists.The moderator for “Help from the Heavens: How to Get Touched byan Angel” is Steve Cohen of Morgan, Lewis & Bockius at CarnegieCenter. On the panel are John Ason and Robert Schaeffer,private investors, and Craig Allsopp, founder of InternetPublishingGroup, which recently expanded from the Straube Center to Newtown,Pennsylvania.For “Getting Ready for the Next IPO Window,” at 11:45 a.m.,the moderator is David Sorin formerly of Buchanan Ingersolland now with Hale and Dorr at Carnegie Center. On the panel is BrendanDougher of PricewaterhouseCoopers LLP at Forrestal Village. Themoderator for “How to Obtain Financing for Your High TechCompany”is Caren Franzini of the New Jersey Economic Development Authority.Panelists are Ty Williams of First Union National Bank, KathleenCoviello of TechBanc/Progress Bank, and Michael Nita of DrinkerBiddle & Shanley LLP at Forrestal Center.”As a strategic partner,” says Boyajian, “we look forthe 5 to 15 VCs who are most likely to have portfolio companies thatmatch your profile, and then we make calls and introduce you. Butat the end of the day you are making your own investmentdecision.””We don’t just call a golf buddy. We have research databases andtrained young lawyers who understand how this space works,” hesays. “We are not the only firm that does this,” he admits.”Our view is that the client will grow and prosper and the clientswill be extremely loyal.”Yes, the attorneys charge for their time, but the time needed to makea call and send a business is, he says, minimal. “Unlikeinvestmentbankers and capital consultants, we don’t take don’t seek remunerationfor these marriages.” The payback comes in the deepening of clientrelationships.Top Of PageNo Bank Loans? Credo Tried EDABrand-new companies, especially high-technology oneswith no track record, don’t find it easy to get bank loans. Somemonies— up to $25,000 or $35,000 — might be made available throughan SBA Microloans (see story below). But even angel investment orventure capital is hard for them to come by.”We had a lot of trouble getting banks or private funders to eventalk to us,” says Jeff Payne, CFO of the Credo Group, whichdoes Web-based direct marketing at 741 Alexander Road. “If youhave been in business two years, you are a high credit risk.”Thanks in part to last year’s NJTC capital conference and advice fromhis attorney, Victor Boyajian of Sills Cummis et al in Newark,Payne applied to the New Jersey Economic Development Authority andcame up with a whopping $466,000 loan from the New Jersey Seed CapitalProgram. (For information on the NJEDA’s Seed Capital Program, call609-292-1800 (www.njeda.com).”When we registered with the state we were sent informationregardingEDA programs,” says Payne. “That was the first time I hadheard of the EDA.” He was reminded of the Seed Capital Programat last year’s NJTC capital conference. “Our attorney alsosuggestedspeaking with the EDA, to get smaller amounts to tide us over untilthe venture capital comes through.” Payne started the financingsearch last February, spoke with the EDA in April, and closed thedeal in October, 2000.The EDA’s Seed Capital loans of up to $500,000 are tailored for youngfirms. “The EDA’s application process required us to prove wecould not get funding from a private bank,” says Payne. “Inaddition, had we been able to get financing, the interest rates wouldhave been much higher.” The loan was prime rate at the time itwas made in October, 9.5 percent for one year, with the term of theloan for five years. The young company will use part of the loan forworker capital needs and the rest for buying equipment it needs togrow.”Getting prime interest rates after being in business a year wouldbe very hard to do,” says Payne. A bank, he says, would havechargeda rate similar to credit cards, “15 to 20 percent if you couldget it.””New Jersey has a strong commitment to fostering the establishmentand expansion of high-tech businesses like the Credo Group,” saysCaren S. Franzini, the executive director of NJEDA, who speaksat the January 26 conference. “Programs like Seed Capital loansand other types of financing incentives demonstrate our commitmentto fostering growth in the technology sector and making New Jerseythe Innovation Garden State.”All three Credo staffers had been working at Langhorne-based DiMarkInc., a large direct marketing agency owned by Hart-Hanks. KevinMcKenna, a Georgetown University alumnus, started a web-baseddivisionthere in 1998 and he and Clair Boger founded the Credo Groupon Alexander Road early in 1999. Payne joined the company thatNovember.An accounting and finance major at Lehigh, Class of 1992, Payne hasbeen with Arthur Andersen in Philadelphia and CFO of DiMark.”At the time we founded our company last year, no one wassuccessfullyincorporating direct marketing techniques with the Internet,”says Payne. “We develop strategies and campaigns, find out whowe should target, and then we buy a list. We picked Princeton asequidistantbetween New York and Philadelphia, and Princeton has a prestigiousname.”The company has insurance, financial, and entertainment clients suchas TransUnion, Globe Life and Accident, and VerticalOne. With about20 employees now, it expects to more than double that within twoyears,and it expanded from the Daily Plan-It at 707 Alexander Road to 741Alexander, next to Easy Graphics, in December (609-750-2640; fax,609-750-9213, www.thecredogroup.com).Payne is still looking for venture capital and recounts hisfrustratingVC financing search. He started by trying to find similar companies,”companies that did deals in our space at the levels of fundingwe wanted to do.” Concurrently he asked Boyajian and the otherattorneys at Sills Cummis to look for a good match. “They havedone hundreds and hundreds of deals,” he says. “At the time,February 2000, people were already pretty heavily invested in ourarea.””We are at the front of the dot com wave, but we are not reallydot coms. And VCs don’t like to have competing companies in theirportfolios. We ended up going to Capital Management Advisors, andare in the process of brokering a deal.”Top Of PageSBA MicroLoansMicroLoans are getting bigger. On January 10, the U.S.Small Business Administration announced that its SBA MicroLoan programhas raised the amount of its maximum loan to small businesses from$25,000 to $35,000. The new rules also permit a higher limit forborrowerswho secure additional financing from another source, upping thepermissiblecombined total from $75,000 to $105,000.This is good news for nascent entrepreneurs, for whom an SBA MicroLoanoften is the best hope for seed money to get a business going, orto keep it growing.Proceeds from MicroLoans, which are made through local nonprofitintermediaries,may be used for working capital, inventory, supplies, furniture,fixtures,machinery, or equipment, but not for the purchase of real estate.The maximum term of the loans is six years.Last year New Jersey businesses received 114 MicroLoans for $2.1million.That is a substantial increase from 1999, when SBA intermediariesmade 68 such loans for a total of $1.2 million.MicroLoans to women and minorities rose last year too. AfricanAmericanreceived 33 MicroLoans totaling $634,445 and women-owned businessesreceived 43 MicroLoans for a total of $738,654.New Jersey small businesses ranked third overall among the stateslast year in the total amount of SBA loans granted, receiving 9,228loans for over $2 billion. The state ranked fourth in MicroLoans.Virtually any type of for-profit small business is eligible for aMicroLoan. Not-for-profit child care centers also are eligible.Applicantsmust meet credit requirements of the intermediary lender.For Middlesex County, the SBA intermediary is the Greater NewarkBusinessDevelopment, (856-966-8181). For Mercer County, the intermediary isthe Trenton Business Assistance Corporation, (609-396-8271). ForSomersetthe intermediary is the Union County Economic Development Corporation,(908-527-1166).Top Of PageMarch Venture Fair: Entries PleaseTechnology and non-technology companies from thesix-statearea (Connecticut to Maryland) may apply to be one of 60 exhibitorsat the New Jersey Venture Fair by Friday, February 2. Fee: $395 fora booth and an optional table. Call 856-787-9700.Sponsored by the New Jersey Technology Council and others, the fairwill be held on Monday, March 26, at Liberty Science Center in JerseyCity. It will include a VC & Financing Network breakfast, lunch, paneldiscussions, exhibitor presentations, awards, and reception. Cost:$150. Early registration for attendees, at $110, is due before Monday,March 12.Previous StoryNext StoryCorrections or additions?This page is published by PrincetonInfo.com— the web site for U.S. 1 Newspaper in Princeton, New Jersey.
