Ask Your Lawyer For Capital Intros

No Bank Loans? Credo Tried EDA

SBA MicroLoans

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 policy

issue for the venture capital industry is the capital gains tax.

Simply

stated, if the rate is raised, the amount of investment shrinks; if

it is lowered, investment increases. NVCA will continue to approach

policy initiatives from the perspective of their impact on capital

formation.

Accounting standards . Proposed rules governing accounting

treatment for business transactions and financial tools continue to

generate controversy. The Financial Accounting Standards Board (FASB),

an independent regulatory body overseen by the Securities and Exchange

Commission (SEC), is moving forward with an effort to eliminate

pooling

accounting for business combinations. In addition, the International

Accounting Standards Committee (IASC), an advisory body made up of

representatives from FASB and other foreign accounting standards

boards,

has issued a paper calling for the expensing of stock options.

Education/worker training issues . NVCA will advocate policies

that expand the opportunities and efficiency of worker training

programs

as well as more fundamental education reform.

Stock options & ESPP legislation . One bill that NVCA will

support lets employees who have been granted stock options to delay

their tax obligation from the exercise date to the date they sell

them. This legislation is aimed at encouraging more retirement saving

by rank-and-file workers through tax-qualified stock options. Another

bill NVCA supports would provide certain tax advantages to expand

the use of employee stock purchase plans (ESPP).

ERISA Reform . As a result of subcommittee hearings,

legislation

was introduced to modernize the Employee Retirement Income Security

Act (ERISA). Work on this legislation, which contains certain

NVCA-recommended

provisions, will continue this year.

Hart-Scott-Rodino reform . The Hart-Scott-Rodino Antitrust

Improvements Acts of 1976 was designed to give the federal government

the opportunity to review mergers, acquisitions, and other business

consolidations prior to a deal’s completion. This would ensure there

was no risk of creating a monopoly as a result of the new organization

being created. One of the criteria for having to file (there’s a

$45,000

filing charge) was that the size of the business needed to be $15

million in assets or more. The revised bill raises the business size

to $50 million. While this will provide certain critical relief to

the venture capital and entrepreneurial communities, additional

legislative

reforms may be pursued in the new Congress including redefining the

definition of "passive" investor and the elimination of filing

fees.

Business process patents . Policy makers are trying to

determine if certain software enabled business process patents, such

as Amazon.com’s patent for its "One-Click" website feature,

pose a threat to E-commerce or if they protect ingenuity and force

competitors to develop alternative — and better — business

processes.

Privacy . Online privacy will dominate the high tech policy

agenda next year. Privacy advocates are seeking strong limits on the

collection and use of online data. Two main issues will be of

interest:

online privacy regulations and database protection. NVCA will advocate

policies that assure the growth and will not impede the promise of

the Internet and E-commerce.

Embryonic/stem cell research . Some 1996 legislation, which

is renewed annually, bars federal funding for research that destroys

embryos. The importance of this issue has been heightened by recent

breakthroughs in harvesting and using stem cells. NVCA advocates

policies

to expand research in this area.

"Events such as NJTC Capital Conference 2001," says

Tyrone Williams , one of the conference panelists, "provide

entrepreneurs with the tools to prepare themselves for the equity

markets and enhance their ability to obtain capital." Williams

is the manager of the Technology Financial Services and Consulting

Group at First Union National Bank, which has a regional headquarters

on Scotch Road in West Trenton. "Businesses seeking capital,"

he says, "need to understand the importance of having an

effectively

written business plan, having the ability to articulate one’s

strategy,

and having the right group of advisors, as well as understanding the

various channels of financing alternatives and the differences between

them. Without access to capital, the technology revolution would never

have happened or continue to grow."

— Michael Schumacher

Top Of Page
Ask Your Lawyer For Capital Intros

As a young firm, you can hire a capital consultant and

pay a percentage of the funds you get, but you can also lean on your

lawyer or accountant to beat the bushes for you. Some law firms do

get very involved in matching their clients with funding sources.

"To compete effectively with the Bay Area law firms, we don’t

wait for people to come to us with a deal, we help young firms access

the dollars and open the doors," says Victor Boyajian, talking

about the services that Sills Cummins offers to midcap and younger

companies. A graduate of the University of Rochester, Class of 1982,

he went to law school at the University of Pennsylvania and joined

the 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 Conference

on Friday, January 26, at 9:35 a.m. at the Princeton Marriott. Jan

Leschly, CEO of Care Capital LLC at Princeton Overlook, will give

the opening keynote at the Capital Conference, followed by Boyajian’s

workshop/panel sessions and two other sessions. Cost: $160. Call

856-787-9700

(www.njtc.org).

Boyajian’s panel is titled "Ten Sure-Fire Ways to Attract Early

Stage Venture Capital" moderated by Gerard S. DiFiore of

ReedSmith LLP at Forrestal Village. The other panelists are Jim

Gunton of NJTC Venture Fund and John W. Reynolds of Kemper

Ventures 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 Forrestal

Village. Among the panelists is Gregory H. Olsen of Sensors

Unlimited at Princeton Service Center.

At 10:40 a.m., the second set of panels begins. "Where to Go When

the VCs Say No: Alternative Financing Techniques for Starting and

Growing a Business" is moderated by Kenneth M. Van Deventer

of Riker, Danzig, Scherer, Hyland & Perretti LLP in Trenton. John

Tesoriero of the New Jersey Commission on Science & Technology

is among the panelists.

The moderator for "Help from the Heavens: How to Get Touched by

an Angel" is Steve Cohen of Morgan, Lewis & Bockius at Carnegie

Center. On the panel are John Ason and Robert Schaeffer,

private investors, and Craig Allsopp, founder of Internet

Publishing

Group, 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 Ingersoll

and now with Hale and Dorr at Carnegie Center. On the panel is Brendan

Dougher of PricewaterhouseCoopers LLP at Forrestal Village. The

moderator for "How to Obtain Financing for Your High Tech

Company"

is Caren Franzini of the New Jersey Economic Development Authority.

Panelists are Ty Williams of First Union National Bank, Kathleen

Coviello of TechBanc/Progress Bank, and Michael Nita of Drinker

Biddle & Shanley LLP at Forrestal Center.

"As a strategic partner," says Boyajian, "we look for

the 5 to 15 VCs who are most likely to have portfolio companies that

match your profile, and then we make calls and introduce you. But

at the end of the day you are making your own investment

decision."

"We don’t just call a golf buddy. We have research databases and

trained young lawyers who understand how this space works," he

says. "We are not the only firm that does this," he admits.

"Our view is that the client will grow and prosper and the clients

will be extremely loyal."

Yes, the attorneys charge for their time, but the time needed to make

a call and send a business is, he says, minimal. "Unlike

investment

bankers and capital consultants, we don’t take don’t seek remuneration

for these marriages." The payback comes in the deepening of client

relationships.

Top Of Page
No Bank Loans? Credo Tried EDA

Brand-new companies, especially high-technology ones

with no track record, don’t find it easy to get bank loans. Some

monies

— up to $25,000 or $35,000 — might be made available through

an SBA Microloans (see story below). But even angel investment or

venture capital is hard for them to come by.

"We had a lot of trouble getting banks or private funders to even

talk to us," says Jeff Payne, CFO of the Credo Group, which

does Web-based direct marketing at 741 Alexander Road. "If you

have been in business two years, you are a high credit risk."

Thanks in part to last year’s NJTC capital conference and advice from

his attorney, Victor Boyajian of Sills Cummis et al in Newark,

Payne applied to the New Jersey Economic Development Authority and

came up with a whopping $466,000 loan from the New Jersey Seed Capital

Program. (For information on the NJEDA’s Seed Capital Program, call

609-292-1800 (www.njeda.com).

"When we registered with the state we were sent information

regarding

EDA programs," says Payne. "That was the first time I had

heard of the EDA." He was reminded of the Seed Capital Program

at last year’s NJTC capital conference. "Our attorney also

suggested

speaking with the EDA, to get smaller amounts to tide us over until

the venture capital comes through." Payne started the financing

search last February, spoke with the EDA in April, and closed the

deal in October, 2000.

The EDA’s Seed Capital loans of up to $500,000 are tailored for young

firms. "The EDA’s application process required us to prove we

could not get funding from a private bank," says Payne. "In

addition, had we been able to get financing, the interest rates would

have been much higher." The loan was prime rate at the time it

was made in October, 9.5 percent for one year, with the term of the

loan for five years. The young company will use part of the loan for

worker capital needs and the rest for buying equipment it needs to

grow.

"Getting prime interest rates after being in business a year would

be very hard to do," says Payne. A bank, he says, would have

charged

a rate similar to credit cards, "15 to 20 percent if you could

get it."

"New Jersey has a strong commitment to fostering the establishment

and expansion of high-tech businesses like the Credo Group," says

Caren S. Franzini, the executive director of NJEDA, who speaks

at the January 26 conference. "Programs like Seed Capital loans

and other types of financing incentives demonstrate our commitment

to fostering growth in the technology sector and making New Jersey

the Innovation Garden State."

All three Credo staffers had been working at Langhorne-based DiMark

Inc., a large direct marketing agency owned by Hart-Hanks. Kevin

McKenna, a Georgetown University alumnus, started a web-based

division

there in 1998 and he and Clair Boger founded the Credo Group

on Alexander Road early in 1999. Payne joined the company that

November.

An accounting and finance major at Lehigh, Class of 1992, Payne has

been with Arthur Andersen in Philadelphia and CFO of DiMark.

"At the time we founded our company last year, no one was

successfully

incorporating direct marketing techniques with the Internet,"

says Payne. "We develop strategies and campaigns, find out who

we should target, and then we buy a list. We picked Princeton as

equidistant

between New York and Philadelphia, and Princeton has a prestigious

name."

The company has insurance, financial, and entertainment clients such

as TransUnion, Globe Life and Accident, and VerticalOne. With about

20 employees now, it expects to more than double that within two

years,

and it expanded from the Daily Plan-It at 707 Alexander Road to 741

Alexander, 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 his

frustrating

VC financing search. He started by trying to find similar companies,

"companies that did deals in our space at the levels of funding

we wanted to do." Concurrently he asked Boyajian and the other

attorneys at Sills Cummis to look for a good match. "They have

done hundreds and hundreds of deals," he says. "At the time,

February 2000, people were already pretty heavily invested in our

area."

"We are at the front of the dot com wave, but we are not really

dot coms. And VCs don’t like to have competing companies in their

portfolios. We ended up going to Capital Management Advisors, and

are in the process of brokering a deal."

Top Of Page
SBA MicroLoans

MicroLoans are getting bigger. On January 10, the U.S.

Small Business Administration announced that its SBA MicroLoan program

has raised the amount of its maximum loan to small businesses from

$25,000 to $35,000. The new rules also permit a higher limit for

borrowers

who secure additional financing from another source, upping the

permissible

combined total from $75,000 to $105,000.

This is good news for nascent entrepreneurs, for whom an SBA MicroLoan

often is the best hope for seed money to get a business going, or

to keep it growing.

Proceeds from MicroLoans, which are made through local nonprofit

intermediaries,

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 $2.1

million.

That is a substantial increase from 1999, when SBA intermediaries

made 68 such loans for a total of $1.2 million.

MicroLoans to women and minorities rose last year too. African

American

received 33 MicroLoans totaling $634,445 and women-owned businesses

received 43 MicroLoans for a total of $738,654.

New Jersey small businesses ranked third overall among the states

last year in the total amount of SBA loans granted, receiving 9,228

loans for over $2 billion. The state ranked fourth in MicroLoans.

Virtually any type of for-profit small business is eligible for a

MicroLoan. Not-for-profit child care centers also are eligible.

Applicants

must meet credit requirements of the intermediary lender.

For Middlesex County, the SBA intermediary is the Greater Newark

Business

Development, (856-966-8181). For Mercer County, the intermediary is

the Trenton Business Assistance Corporation, (609-396-8271). For

Somerset

the intermediary is the Union County Economic Development Corporation,

(908-527-1166).

Top Of Page
March Venture Fair: Entries Please

Technology and non-technology companies from the

six-state

area (Connecticut to Maryland) may apply to be one of 60 exhibitors

at the New Jersey Venture Fair by Friday, February 2. Fee: $395 for

a booth and an optional table. Call 856-787-9700.

Sponsored by the New Jersey Technology Council and others, the fair

will be held on Monday, March 26, at Liberty Science Center in Jersey

City. It will include a VC & Financing Network breakfast, lunch, panel

discussions, exhibitor presentations, awards, and reception. Cost:

$150. Early registration for attendees, at $110, is due before Monday,

March 12.


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