When venture capitalists say “NO”—creative financing strategies & resources, by Ron Peterson
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- 34. Labor union pension plans.
- 35. Investment banks.
- 36. Independent broker-dealers.
- 37. Commercial bank equity.
- 38. Small stock offerings (SSOs)
- 39. Internet offerings.
- 41. Government grants.
- 42. Government technical transfer.
- 43. Foreign government technical transfer.
- 44. Non-profit technical transfer.
- 45. Venture capital technical transfer.
33. Public sector pension funds. State employee retirement funds have more than $2 trillion in assets and have been frequent investors in venture capital funds. With the meltdown in venture capital returns in the early 2000s, they may increasingly be sources to make direct investments. Retirement Systems of Alabama (RSA) is a multi-billion dollar repository of investment money that aggressively seeks high returns to fund their obligations. They also have their eye on placing money where it can help the state economy. RSA bid $240 million for just over a third of U.S. Airways and provided loans and a rescheduling of leases for the ailing airline. They feel that 59 million passengers make for a good investment but also that future US. Air operations will be moving to Alabama. The Retirement System has a superior history of investing in downtrodden assets that later generate huge profits and they are willing to take a chance. RSA provided early funding for a Hispanic radio and television network that grew into a nationwide and profitable network. The Wisconsin State Employees Retirement System was directed to make a $60 million investment in state life-science companies to help mold a biotechnology industry there (see chapter 11). The State of Virginia normally has 5% to 10% of its money in venture type investments and in early 2002, with the stock market in poor shape, still had 6% of its money committed in this way. The biggest pension fund of all, CalPERS put as much as 4% of their funds into venture capital. CalPERS has also made direct investments including $122 million in Sports Capital Partners, an affiliate of sports marketing firm IMG, the group that represents Tiger Woods, among many others. 34. Labor union pension plans. Labor union funds control hundreds of billions of dollars and are increasingly making alternative investments. Charlie Schoenhoeft was going hat in hand among venture capital firms with his broadband services provider offering. The economy had weakened, venture capital was held back and investor enthusiasm was a distant commodity. A private equity firm in Washington DC that represented union pension plans was willing to come up with the $5 million needed, once Schoenhoeft passed the due diligence test. As you could expect, union investments come with requirements for a generous equity plan for employees, training programs, workforce safety and other benefits aligned with the labor movement. 35. Investment banks. Wall Street firms such as Warburg Pincus, JP Morgan, Goldman Sachs and many others regularly put together companies just like many venture capitalists, or otherwise run their own venture capital funds. Entrepreneurs may think of them only for the IPO route but they are active in private placements, mergers and acquisitions, and have impressive credentials and contacts throughout technical and capital communities. Houston-based investment banking firm Sanders Morris Harris formed an $11 million fund just to invest in functional genomics and proteomics companies, but has another $3 billion under management. Many smaller investment banks have come into being as talent has left the big firms to strike out on their own. New firms like Catapult Advisors and Revolution Partners have handled mid-level transactions and startups and are approachable, something their big brothers usually are not. America’s Growth Capital was formed in Boston, MA by bankers out of huge firms that were acquired, and is focused on the New England market. The firm of William Blair in Chicago, IL has excellent Wall Street credentials yet remains accessible to young companies. If you have connections with some of the larger firms, you may prefer those with a solid commercial banking affiliation (or ownership) so that if an IPO market disappears they may have a funding alternative for you in-house. 36. Independent broker-dealers. Largely ignored by their well-known bigger brothers such as Merrill Lynch, the thousands of small broker-dealers that are found across North America (with good overseas connections as well) constitute an important funding avenue. These firms usually consist of less than thirty brokers but can house important specialties and access funding niches that prove ideal for emerging companies. Perhaps most importantly, while big firms won’t give you the time of day, these people are accessible. Norman Swanton, CEO of Warren Resources, raised tens of millions of dollars by making presentations to broker-dealers through an organization known as FSX (Financial Services Exchange, www.FSX1.com). Smaller broker-dealers often have been formed by talented brokers who chose not to remain with big firms. Their doors can also house many registered investment advisors. 37. Commercial bank equity. Your banker could be a source of investment capital as well as giving a line of credit or loan. Some of the most visible banks that make venture capital investments or “merchant banking” activities have been Chase, Bank of America, Fleet and First Union but many smaller banks are active as well. Honolulu, Hawaii-based City Bank formed a $7.5 million venture capital fund to stimulate small businesses in the islands. Large banks may operate separate VC companies such as First Union Capital Partners while others will have a restricted form of investing, depending upon their regulatory environment. The important thing is to get to know your bankers and use their knowledge to facilitate your funding needs. One banker with good international connections arranged to guarantee a company quick payment but arranged for their overseas customers to extend their credits over a number of months. 38. Small stock offerings (SSOs) (See chapter eight) Registered stock offerings such as IPOs or Direct Public Offerings (DPOs), like Oregon’s Willamette Valley and Jim Bernette, have been perfect fund raising tools for a number of companies. Bernette used thirteen of these small stock offerings to finance a successful winery and then local breweries across the country. The founder of Control Data, William Norris, and Dr. Ed Land of Polaroid, purportedly both personally sold stock on the streets of Minneapolis and Boston, respectively. Tom Ling began the giant LTV by selling stock out of a booth at a Texas state fair. Ross Perot used a small stock offering for EDS as well. Robert Kopstein, CEO of Optical Cable in North Carolina, used a DPO and became the best-performing public offering of 1996. After going through the registration process, two investment bankers backed out of the deal and told Kopstein that the stock couldn’t be sold at $7.50 a share. He offered it directly at $10 instead, raised about half of what he was looking for, and then watched the stock go as high as $136. More Americans as well as people around the world now own shares in companies than they ever did before. About half the households in the U.S. own stocks. Many of these holdings are in retirement funds, suggesting that most people are long term oriented and put their faith in the prospects of these companies. When bear markets surface and portfolios sink in value, it becomes ever more difficult to hold on, even when people are convinced they’re right. One of the beauties of investing in private placements or in small companies directly that don’t put their shares on a stock exchange is that the investor is freed from the vagaries of the markets and the disappointments and difficulties that daily fluctuations in price bring to the holder. This is one of the many reasons that investors should examine shares in companies that don’t qualify yet for exchange listings, but have business models that can be truly visionary. Private offerings are regularly used to secure funding for firms where existing connections to investors can be demonstrated. Grey Eye Glances is a Philadelphia “adult alternative” band that raised several hundred thousand dollars for a new album by selling interests in the album to part of its fan base. 39. Internet offerings. Using the Internet to find investors or make an offering provides an alternative to the traditional method of offering registered stocks to the public and can eliminate many costs for young companies. One of the biggest of these costs is printing and mailing and, since the registration statement can be placed on a website, can effectively eliminate this cost while speeding transactions. California Molecular Electronics sold stock through its own website and used the proceeds to further leverage a grant, and later a private placement. Many organizations will list your offering at special sites on the Internet but experience suggests that technique alone won’t produce many investors unless separate and extensive efforts are made to make people aware of your company. This entire area remains uncertain and it is best to check with your attorney before launching any efforts. The SEC provides guidance as well at www.sec.gov. 40. Franchises. Paychex, Inc. bootstrapped itself through a combination of joint ventures and the sale of franchise agreements, an enviable source of up-front capital. AT&T sold telephone rights to local carriers and countless other entrepreneurs have looked for similar front-end money. Tarid Faraq of Edible Arrangements expanded his fruit offerings out of East Haven, CT by selling franchises for between $60,000 and $120,000, including a $25,000 fee and a 4% royalty. You can be either a seller or a buyer of a franchise, depending on whether you want to introduce your own business model or use someone else’s idea. Many formal franchises are bankable commodities and you may find that lenders are more than willing to put up a good chunk or even most of the money needed to buy and operate a proven business franchise. I’ve seen instances where an experienced businessperson contracting for five or more franchises had to put up none of their own money. 41. Government grants. This is a multi-billion dollar resource for young companies and is concentrated in Small Business Investment Research (SBIRs) and Technical Transfer Grants, detailed for you at www.sba.gov/sbir, program specifications at www.eng.nsf,gov/sbir and open solicitations at www.SBIRworld.com. PLI Systems in New Jersey couldn’t raise the $5 million it was looking for from the venture capital community but obtained $1 million from the Department of Energy (DOE), $200,000 from the NJ Commission on Science and Technology, and $2 million in grants from the National Institute of Science and Technology (NIST) Advanced Technology Program (ATP, www.atp.nist.gov, see Appendix A). PLI convinced the feds they could save U.S. companies $75 billion a year and bring in an additional $10 billion in improved productivity with a software program to predict corrosion, not a bad promise. NIST is an agency within the Department of Commerce that makes a wide variety of grants oriented to improving businesses processes and new technologies. $2 million went recently to Cinea, Inc. from NIST to develop a technology that could foil media pirates who use a video camera to record movies right off the big screen. ATP awards are intended to accelerate technology research, but they’re not designed to support product development work—that’s supposed to come from you. You may also have to show research or technical affiliation with a university, a way of ensuring cooperation between academia and industry. SBIRs and ATPs have often been suggested as the best path for ideas that have little formal organization at the outset, but need nurturing. Links to all of the agency pages for SBIRs are at www.win-sbir.com/related.html. Noesis, Inc. teamed with researchers at the University of Virginia to develop advanced metal fiber brushes for generators on U. S. Navy submarines. Receiving both Phase I and Phase II SBIR awards, the company developed the technology, earned a $9.5 million Navy contract, and now is actively commercializing the technology. ATP has been called the federal government’s first venture capital firm. They operate with a provision that any applicant has to demonstrate that they couldn’t receive funding from conventional VCs. ATP solicits grant proposals from companies involved in innovative but high-risk research that have a reasonable path to commercialization. A number of companies involved in a promising area such as nanotechnology have received funding, including eSpin Technologies, Inc., receiving $2.5 million for a system that will let it manufacture nanofibers much more inexpensively than at present and in substantially greater volume. Britain’s Department of Trade and Industry (www.dti.gov.uk) operates a grants program known as SMART awards that closely parallels the SBIR process and permits small British companies access to funding from as little as $4,000 (equivalent) to over $600,000. The idea is to foster commercialization of technology and the formation of new companies. Background on fund availability in the U.K. is detailed at www.sbs.gov.uk/finance along with help on getting funds at www.localpartners.org.uk, www.nfea.com and www.smallbusinessadvice.org.uk. The SCORE program of the SBA provides counselors and the SBA has hosts business articles including Small Business Financing Options at www.score.org. Most entrepreneurs have heard about SBA loans, etc., as a potential source of capital but don’t know the many separate categories that money is made available for. Exports, seasonal inventory needs and defense conversion are several areas in which special SBA programs exist. Loans are usually made following establishment of the business and at least a little history. Valencia Roner, the founder of VXR Enterprises of Culver City, CA, started her PR and marketing company with $5,000 of savings. She was confident that a good-sized contract was coming her way and felt good about taking a loan risk. That contract never materialized but she went ahead and obtained several smaller assignments and used that income to justify a $50,000 loan through the SBA. With those funds in hand she bid and won a $250,000 City of Los Angeles Workforce Investment Board contract and was well on her way. Her key was approaching the SBA lender with actual contracts and letters of intent in hand, demonstrating that she was a going business instead of just an idea.
You can view patents the government has available at www.uspto.gov. The U.S. Defense Department is an excellent source for technology as are university programs such as those of MIT, Stanford, etc. Try www.DARPA..mil for a list of technologies that the military is looking for as well as a source of funding, if you have a solution to their needs. Los Alamos National Laboratory (LANL) in the Department of Energy has generated technology to found almost seventy companies in the last five years and has over a dozen employees on entrepreneurial leave. LANL technologies included a process for creating high-density microchips and one on complexity science techniques to help financial institutions predict economic crises. The Lab has recently launched a separate effort to develop an informatics cluster. LANL’s sister lab at Oak Ridge, TN cut an innovative deal with Nanotech Capital LLC of Tryon, NC to commercialize nanotech research taking place at that lab. Nanotech Capital consists of just four entrepreneurs who seek to raise capital on the strength of this affiliation and use a network of universities to help develop commercial products. The National Institutes of Health spends over $25 billion annually on biomedical research and actively promotes transfer of discovered and developed technologies to the commercial sector. The NIH website at http://ott.od.nih.gov will help lead you through the maze and you can talk to their staff about SBIR and other funding avenues. A number of prospective licenses and technical opportunities are listed at www.tarius.com. The FDA has an orphan drug program that promotes treatments for rare diseases, and can provide as much as $300,000 in funding per year for 3 years in competitive grant funding, federal income tax credits for 50% of all expenditures for human clinical trials, and a waiver of user fees. The most sought after incentive is the seven-year orphan marketing exclusivity. Enzon, Inc. was formed out of a Ph.D. thesis at the Rutgers School of Pharmacy on a polyethylene glycol (PEG) process to enhance existing therapies through coatings. The target disease was a rare immunodeficiency malady commonly called “bubble boy disease,” an affliction that represented only 40 to 50 cases in the world. The young company’s initial market was tiny but the enzyme-replacement therapy technique it used became a platform that was extended to other applications and allowed the company to grow to $120 million in 2003 revenues with 60% profit margins. “Amgen, Biogen, Enzon, Genentech, Pathogenesis and Sigma Tau all were founded upon an initial drug product which had ‘orphan’ status in an FDA program to develop orphan products.” Robert F. Steeves, FDA. Genzyme is one of a few profitable biotech companies and owes its success to its orphan drugs Cerezyme to treat Gaucher’s disease and Fabrazyme for Fabry’s disease. Biogen generated revenues of nearly $1 billion in 2002 sales of Avonex, an orphan drug now used to treat multiple sclerosis. The Robert C. Byrd National Technology Transfer Center supports tech transfer generally from its website www.ntte.edu at Wheeling Jesuit University in West Virginia. A weekly online magazine on technology transfer is found at www.globaltechnoscan.com with information and articles on business opportunities, licensing, research financing, patents, venture capital and general finance along with links to international technology and professional services. A magazine covering NASA tech transfer www.nasatech.com and technologies for all NASA centers is found at www.teccenter.org. TSI TelSys Corporation was begun with NASA encouragement by people who had worked on satellite IT at the Goddard Space Flight Center. 43. Foreign government technical transfer. Overseas opportunities need to be examined in a global economy. The UK’s leading biological and chemical defense research center, the Defence Science & Technology Laboratories (DSTL) west of London, has worked with a local venture capital company, Circus Capital, to set up four commercial companies so far and promise a good deal more. One of the technologies developed was a rapid test for bacterial contamination in food and formed the basis for the new company Alaska Food Diagnostics. DSTL and Circus Capital are hoping to commercialize another technology that was developed to protect troops from a biological attack but also permits fabrics to become nearly 100% resistant to stains. Cotton shirts repel water better than raincoats and goggles don’t fog up, reports the Financial Times. In Germany, the Fraunhofer Institutes conduct open research benefiting entire industries as well as contracted research for large companies. The European Molecular Biology Laboratory (EMBL) in Heidelberg, Germany, formed a technology transfer arm known as EMBLEM. They also have a life sciences incubator and a $50 million venture capital fund for European startups. The incentive for EMBLEM has been Lion Bioscience, a company that was formed out of EMBL, had an IPO in 2000 and was felt to be a perfect model for other new biotechs. The European Patent Organization set up an Internet service called esp@ce.net to give researchers free access to technical information. Information on competitors, company patent portfolios, geographic coverage of a patent and technology generally is available at www.european-patent-office.org/espacenet/info. Oxford Innovation, Ltd., of the UK plans on opening an innovation center in North Carolina for biotech ventures. The model they’re exporting has been developed in 13 centers in the UK, launching over 200 new ventures. Oxford Innovation intends to make this foray into the New World a mechanism for two-way technical transfer between foreign and domestic engineers and scientists as well as the making of a biotech industrial cluster that mates manufacturing and development. Other countries around the world are also looking to commercialize their research products and may be a source for both technology and funding.
A startup in Blacksburg, VA, Luna Innovations, worked with Virginia Tech University to spin-off five companies and attracted $70 million in outside funding and contracts. Luna expected to replicate its technology transfer and research functions to enable new companies to be spun out from other universities. A venture capitalist at In-Q-Tel, the CIA funding arm, suggested that her real network of finding attractive technologies lay in knowing people who were familiar with university outputs, not the tech transfer offices themselves. BMW formed a $100 million venture capital fund, based in New York and named iVentures, to invest in “providers of location-based and other premium mobility services. In response to the dramatic changes going on in automobiles and, the firm felt the best way to keep track and involve themselves early was to have a focus on technologies brought to them for funding. Osage University Partners at www.osagepartners.com invests in university start-ups, partnering with universities such as Yale and Penn to co-invest in new firms that license university technology. Osage is called in early-on and assists a firm prior to an investment and monitors the company while providing suggestions right along. Directory: documents documents -> Concept stage documents -> Concept stage documents -> The great global switch-off documents -> Nonprofit grant application documents -> The Truth about the Rwandan Genocide documents -> Annual InStructional unit plan documents -> Chaos equipment included Download 1.2 Mb. Share with your friends:
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