Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: SUNDAY, March 5, 1995 TAG: 9503040019
SECTION: HORIZON PAGE: G-5 EDITION: METRO
SOURCE: JEFF DeBELL STAFF WRITER
DATELINE: LENGTH: Long
Elephants are what he calls the huge established companies like IBM or General Electric.
Gazelles are newer businesses that have growth potential. An example would be a company formed to commercialize new technology.
Mice are small businesses, sometimes called mom-and-pop operations. Their growth potential is limited. In fact, they are sometimes formed primarily to give the entrepreneur a job.
Elephants can take care of themselves when it comes to raising money. Gazelles and mice often need help, both at the seed stage and at later points of development.
In more than 70 percent of cases, Jennings said, the primary source of seed money is the entrepreneur's own resources: his bank account, his credit cards, his friends and family, etc.
Banks can help launch a business, but Jennings said they expect borrowers to have equity in their enterprises. Even so, they typically will want plenty of collateral and will want the loan to be backed by a guarantor such as the Small Business Administration.
"Start-up is as risky as it gets," Jennings said, and banks don't like risk.
They do like documentation: a business plan, financial projections and the like. They pursue it so assiduously that Anita Smelser, wife of a Salem man who recently borrowed money to open a machine shop, used to get what she called "banker's headache" while visiting the lenders with her husband.
Many budding entrepreneurs are wholly unprepared to provide such documentation, but the Blue Ridge Small Business Development Center can help.
Jennings and his staff will help prepare the business plan and whatever other information the bank needs, including the loan application itself. They will brief the applicant on how to talk with bankers, and even visit lending institutions with the applicant.
Jennings estimates that the center has counseled 700-800 businesses in its five years of existence. Its services are free.
One of a number of such operations around the state, the Blue Ridge SBDC is supported primarily by the Roanoke Regional Chamber of Commerce and occupies offices adjoining the chamber's in downtown Roanoke.
Additional support is provided by the Small Business Administration, the Virginia Department of Economic Development and the city of Roanoke.
Larger businesses and small businesses that show growth potential can seek financial support from other sources - investors, as opposed to lenders.
One such source is what Jennings calls the "angel network" of wealthy individuals. The network is hard to penetrate because its members guard their privacy to avoid being pestered by would-be entrepreneurs.
The angel network is also small, particularly in relatively unpopulous areas like the Roanoke region.
"Most of the wealth in this general community has either died or moved to Florida," said Greg Feldmann, a Roanoke financial consultant. What remains is oriented more toward capital preservation than venture investing, he said.
Angels buy into only a small fraction of the many opportunities that come their way.
"It's not hard to find fund-seekers," said Brian Duvall of Roanoke. "It's much harder to find investors."
Duvall functions as a potential link between the two. He's regional director of The Investment Exchange, a computer listing of entrepreneurs who are looking for investors.
Entrepreneurs pay a fee to be included in the listing, which is sold to subscribers. If one of the latter spots an investment that interests him, it is up to him to follow through.
Duvall said his typical angels are people with family money, retired business executives or laid-off managers who received golden parachutes and are "tired of playing golf."
Suzy O. Robertson works the same street as Duvall, but from the other side. Whereas his service delivers fund-seekers to investors, she promises fund-seekers at least five potential investors in return for a fee.
"He and I are both trying to bring economic development to Virginia," she said. "That's the major substance of what I'm all about."
Her company, based in Eagle Rock, is called Robertson Business Services and so far is a one-person operation.
Though buying stakes in companies constitutes "venture capitalism" and can be practiced by anyone, the term today refers most often to the large investment pools that are collected for that sole purpose.
The pools are assembled by professional investors, usually called general partners. Those who contribute to the pool are called limited partners.
The industry is heavily segmented. Most funds invest in companies that are more or less established and ready to develop, but a few specialize in seed money.
Venture capitalists pick their investments carefully. There are plentiful opportunities, but the risk can be great, particularly with very young companies.
"The burn rate on that is very high," Feldmann said. "The pros look for stuff with very high growth potential."
A typical point of investment is when a company is past the seed stage and ready to begin providing a service or building and selling a product. That's called first-stage or start-up investing.
Second- and third-stage financing may be sought when companies are ready for expansions, even though the companies may not yet be profitable.
Venture capitalist funds do not simply invest in a company and wait until it's time to cash in. Instead, as a means of protecting their investments, they get involved in company management and policy. Sometimes, venture capitalists end up taking over the companies they invest in.
"The earlier you are in developing a business, the more control you're going to have to give away," said John Jennings.
by CNB