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Capital Conference: Franzini
These articles by Barbara Fox were published
in U.S. 1 Newspaper on February 18, 1998. All rights reserved.
Government can work in amazing ways. It can take money
raised by bonds or taxes and let venture capitalists multiply those
funds. And it can take tax dollars it did not collect and let a young
company sell those tax credits to a larger firm.
One of the panels at the New Jersey Capital Conference this Thursday,
February 19, will explain these puzzling opportunities. Jim Millar
of Early Stage Enterprises has organized an 8:30 a.m. panel that
features Caren Franzini of the New Jersey Economic Development
Authority (NJEDA), Jay Brandinger of the New Jersey Commission
on Science and Technology (NJCST), and Don Christianson of the
Small Business Administration.
For registration information for the conference, which runs through
lunch and costs $150 at the door, call the New Jersey Technology
The NJEDA — which funds itself through bonds and its own
— made the first donation to a venture capitalist when it gave
$2.5 million to the Edison Venture Fund. Last year the NJCST gave
$4 million of its appropriation from the state commerce department
to Early Stage Enterprises for a similar purpose, to make equity
in early stage companies in this region. The results make any taxpayer
breathe more easily.
"We saw there was a need for more venture capital for New Jersey’s
business, and we did not feel we knew best how to make
says Franzini. The Edison Venture fund responded to a request for
proposals, and the EDA board approved a $2.5 million investment in
that fund. "We feel it has been a great success," says
"Edison has invested $15 million in seven New Jersey companies,
and our money was leveraged six times."
Millar says that the Edison investment was "a pioneering
for the EDA, which raises its funds through bond issues. "Some
states shy away from public private partnerships, but we will invest
multitudes more than the $4 million the commission has invested in
us. They get their money back at the same time as the other investors
in our fund get it back." The $4 million has burgeoned into $40
million of capital for investment, says Millar, "because we have
raised additional private capital and are now a licensed SBIC (Small
Business Investment Corporation)."
Early Stage Enterprises has four current investments and two more
on the way, with the typical gestation period (until the IPO) expected
to be five years. Only one of the four ESE companies so far is in
Princeton: NetTech Systems, the Research Park-based firm with wireless
communications software. The others are in New Brunswick, Radnor
and Richmond, Virginia.
Franzini, an urban studies major at the University of Pennsylvania,
Class of 1980 with a Wharton MBA, is expected to announce at the
that EDA may soon act as its own venture capitalist organization (see
story on Franzini on page 46). "We are getting what we feel is
a good return on our investment, so hopefully we can make another
investment, either in a venture capital fund or by establishing our
own investment vehicles for financing high tech companies," says
Franzini. "We have been on the learning curve to understand the
needs of the industry and feel it would be beneficial to finance these
She’s looking at similar programs in Pennsylvania and Utah. Why not
just keep funneling funds to those in the business making venture
capital available? "Because the venture capital community is
needs of $500,000 and above, and we are sometimes talking about below
that range," says Franzini. "We’d rather partner with existing
organizations, but if there is a gap in the marketplace we want to
fill that gap."
Another way that EDA can fill gaps is by guaranteeing loans. If a
bank does not have enough "comfort level" with a loan, the
EDA can stand behind it, just like the SBA might. But the state EDA
can be more flexible than the federal agency.
"One of our star examples is Sensar," says Franzini, referring
to the Sarnoff spinoff that is now based in Moorestown. "The bank
was willing to provide financing but they felt uncomfortable with
the startup nature of the company, and we provided a guarantee. We
are always trying to get the private sector involved, and we provide
the comfort level."
About those tax credits that can be bought and sold: It’s hard to
explain, but here goes. It’s as if a minimum wage earner who pays
no income tax could sell her deductions to someone in a high tax
By state law, technology companies can take research and development
tax credits. But young companies are so poor they aren’t paying the
nine percent corporate tax, so these credits aren’t helpful.
Under a law passed last month (Senate Bill 446), the young and poor
firm can sell the tax credit to the more profitable firm. The bigger
company pays at least 75 percent of the value of the credit. The small
company can use the proceeds mostly for fixed assets but also for
salaries and working capital.
In a similar way, the deductions for a net operating loss can go
be carried over, and sold. It’s called the Corporation Business Tax
Benefit Certificate Transfer Program (Senate Bill 447). "With
this legislation, New Jersey is demonstrating its desire to be the
home of the exploding hi-tech industry," said State Senator Robert
Singer, the bill’s sponsor (732-901-0702).
Just who will broker these tax credits and how much those credits
will be worth is yet to be determined. For a detailed guide to EDA
programs, "The Power to Help New Jersey Business Grow," call
609-292-1800 or write to NJEDA, Box 990, Trenton 08625, or go to
The site has a clickable map locating EDA projects by county and a
questionnaire that helps companies figure out what programs might
work in their business.
Your firm can’t afford to hire expert advice but you
desperately need cash? You may need the services of a "financial
intermediary" such as Dan Conley of Funds for Business +
Leasing. Conley can work on a flat fee or a retainer but he can also
help you raise money on a percentage basis.
He will discuss alternative financing and debt capital instruments,
particularly loans for credit, working capital loans, term loans,
and other project financing at the New Jersey Capital Conference on
Thursday, February 19, at 9:30 a.m. at the Marriott. For registration
information ($150 at the door) call the New Jersey Technology Council
Your company must smell of success before Conley will take you as
a client. Companies that succeed are likely, he says, to have gone
through the usual channels: going to the Small Business Development
Center counseling, settling into incubator space, attending venture
capital association luncheons, exhibiting at the venture fair (itself
a Good Housekeeping Seal), and winning an award at the venture fair,
an honor that comes to less than 10 percent of the prospects.
Even then, the odds against attracting venture capital are high.
capitalists look at 1,000 business plans a year but invest in three
to five," says Conley. "Many thousands more could have
How do we help those companies? Maybe we have to revisit the business
plan, get private investment, restructure so banks and the SBA can
invest in them."
Financing technology companies takes imagination, and the debt capital
buffet has many dishes, says Conley. To choose the right one you need
expert help. "For 12 years I have been providing capital for
owners," says Conley. "I can broker loans and help facilitate
project financing and help a business owner get credit. If a firm
has weak credit I can find a source of funds at a price and structure
that meets their business needs."
He operates, in essence, as an on-call chief financial officer (or
as an assistant to the CFO) in raising capital. "Business owners
don’t want to go into the bank alone; they need an expert fiduciary
to help navigate those rough waters," he says. "I get my money
from dozens of different sources. I represent them in the debt capital
marketplace and find the structure and the cost that fits their needs
and their philosophy."
Sometimes his task is project oriented, to finance $2 million worth
of machinery or smaller ticket items such as a computer system for
$40,000 in hardware and $100,000 in software and training services.
In former times, banks would never fork over a loan for software,
but that is changing. "The banking industry," says Conley,
"has finally got its head out of the sand in recognizing that
software can be used as a tangible asset and be looked at as
A company starts out bootstrapping — borrowing money from family
and friends who expect to get paid back in either cash or equity.
The next stage, says Conley, is when there is a proven prototype or
market margin. At this point the company may qualify for Small
Administration loans or loans from local banks or the Economic
When the business is "up and running" then Conley can help
with some creative alternatives. "I cannot compete with the
he says, "but I am there for an additional line of credit or an
additional line of capital."
By this time the money is being loaned "for all the right
and the company has something which will enable them to pay their
debts. The bank might lend money at prime plus one (prime rate of
interest plus one percent), but the bank also probably charges
fees. Conley says his sources can finance projects at a rate of
from below prime to twice prime, but without any extra fees.
If, for example, a company has $3.5 million and is going hunting for
$10 million of venture capital — but also needs a bridge loan
of $2 million until the $10 million comes through — that’s where
Conley can help.
Or if a company has a willing customer who is a late payer, Conley
can draw up a trade acceptance draft that involves approving the
credit. If the customer is buying $20,000 worth of merchandise but
can pay only after six months, the customer issues some post-dated
checks and Conley’s source fronts the money to the company.
Sometimes he charges a flat fee or a retainer but his percentage fee,
based on the Lehman formula, is roughly five percent of the first
million, four percent of the second, down to one percent of the fifth
million raised, and then 1/2 percent for each additional million.
Sometimes he also charges for the "due diligence" process,
"to find out about the skeletons in their closet before the banker
As a funding intermediary Conley’s work depends totally on reputation.
"People can be tossed out on their ear if they are doing the wrong
thing. We have to watch out for charlatans," says Conley, "and
you’ve got to be in it for a very long time. It’s a very patient
He began doing this 12 years ago. He grew up in Belmont,
near Boston, where his father was a technical sales engineer. He would
have been in the Class of 1980 at the University of Massachusetts,
except that he joined the Marine Corps and spent 10 years getting
his degree. Meanwhile he worked at Wang and Apollo as a security
"I saw how they were doing all this really neat stuff with
and understood that companies were growing by using high technology
Conley started out in the leasing business and was recruited by G.E.
Credit to help build a $100 million portfolio. Then he joined a Boston
firm (his new wife was at MIT) to package syndicated transaction.
He hung out his shingle as a solo practitioner in 1991.
So where is all this non-bank money coming from? Private placements
or angels. "Angel investing is a huge arena, and it is not
says Conley. "People that have this kind of disposable money don’t
want to have to jump through hoops. Some are philanthropists and they
get psychic income, besides financial income, backing neat stuff that
is good for humanity. Others are trying to secure their own future
through another pension investment vehicle."
Conley insists that not everyone who offers cash will be allowed to
invest in a particular project. "If there is high return, it means
there will be a high risk, and this is only available to accredited
investors." The firm needs to be sure your investment is
comfortable so it doesn’t get into legal trouble if it goes public.
An "accredited investor" should have a net worth of at least
$1 million and usually annual compensation of more than $250,000.
Conley has his own stable of angels. Actually he calls it a garden
— the Silicon Garden Angels Investors Network. "It’s a quiet
group, off the radar, and they only want to be talking to highly
entrepreneurs with `skin in the game’ so they can’t walk away
It’s a virtual group, and he convenes it when he invites an
company to present its business plan. Don’t everyone knock, because
the gate is high. "My job is to carefully to screen in the
companies and screen in the qualified investors. There is a certain
amount of due diligence, and each side needs to feel there is a
and feel there is a long term trust," says Conley. "It’s all
going to be in writing with clear expectations."
At the New Jersey Capital Conference, John Martinson of Edison
Venture Fund gives the welcome and keynote address followed by
workshops. At 8:30 a.m.: "Private Equity Sources for Intermediate
Stage Companies," with Jim Gunton of Edison Venture Fund,
Dick Robbins of Arthur Andersen, Gerard DiFiore of Reed
Smith Shaw McClay, and Geoffrey Stengel of BT Alex Brown. Also
at that time, "State and Federal Backed Financing," with
Franzini of New Jersey Economic Development Authority, Jay
of the New Jersey Commission on Science & Technology, Jim Millar
of Early Stage Enterprises, and Don Christianson of the Small
"Growing Your Company through Mergers, Acquisitions, and
at 9:30 a.m. features Tim Scott of Price Waterhouse and James
Roberts of PNC Bank. "Debt Capital Sources & Solutions,"
also at 9:30, has Nat Prentice of BT/Alex Brown, Dan
of Funds for Business + Leasing, Arthur Birenbaum of Jefferson
Bank, and June C. George of BT Alex Brown.
At 10:45 a.m.: "How to Finance Roll-Ups," Brian Hughes
of Arthur Andersen and Jim Hunter of Janney Montgomery Scott,
or "Joint Ventures/Strategic Partnering" with Bill Thomas
of Buchanan Ingersoll and Steve Socolof of Lucent
David Sorin of Buchanan Ingersoll and David Proctor of
Janney Montgomery Scott present the outlook for IPOs at 11:45 a.m.,
followed by lunch with Nelson as the featured speaker. At 2 p.m. CFOs
and financial executives will have their own roundtable on the IPO
High tech can’t get too much attention for Conley, who coined the
state nickname Silicon Garden (a deliberate reference to the Valley,
the Forest (Seattle), the Highway (around Boston), the Alley (southern
Manhattan), the Island (Long Island) and the Gulch (Texas).
is trying to get the moniker going," says Conley. He holds the
copyright on this one.
That all important issue — training — will be
the discussion subject at the American Society for Quality on
February 19, at 5:30 p.m. at the Marriott. For $20 reservations call
Kathleen Mayer at 609-716-3139. The topic, "The Truth about
Training: An FDA/Industry Dialogue," concerns manufacturing
The speakers are Laura Pence, a director of good management
practice training at Warner-Lambert Company in Morris Plains; and
Karyn M. Campbell, compliance officer with the Philadelphia
District of the U.S. Food and Drug Administration.
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