Venture capital running strong for fledgling businesses
Boston — Solex Corporation says it makes a first-rate product - one of the best in the solar collector business. ''It's all nonmetallic - half the cost of (traditional) metallic collectors - and just as fast and efficient to use. It's usable for space heating, hot water heating, pool heating, and for agriculture, '' says Charles D. Edwards, vice-president of the 51/2-year-old company.
Frank Kurka believes his seven-month-old company has a fantastic product line , too. ''Kurka Corporation makes (software and hardware) products for IBM systems that you can't buy from IBM. No matter what IBM makes, it implies there will be more to do, so we have a perpetual market.''
But both companies now say they need a substantial amount of financing to keep their businesses growing. They are looking to the venture capitalist to get it.
The money hunt may be relatively easy, compared with several years back. Stanley Pratt, editor and publisher of Venture Capital Journal, says that ''venture capitalists have got more money now than they ever had.'' This is good news for the entrepreneur who faces government cutbacks on small business loans (many of which will be eliminated by 1983) and high interest rates when it comes to borrowing from a bank.
Broadly speaking, a venture-capital firm manages a pool of money which others (pension funds, insurance companies, etc.) have contributed to. The firm is on the lookout for a company with high growth potential. The venture capitalist will add to that company's capital base (usually to the tune of $500,000 or more), in exchange for part of the new company's equity. The venture capitalist hopes eventually, say after five to seven years, to make a huge profit when the company goes public - at which point the venture capitalist sells its shares on the open market.
The last four years have been active ones for venture capitalists, as against the period 1970-77. During that time, the government imposed a stiff capital-gains tax on profits, and the total pool of venture capital available to entrepreneurs hovered at around $2.5 billion to $3 billion, Mr. Pratt says. But when the tax was decreased in 1978, and lowered even further last fall, the total pool steadily rose. Last year it reached $5.8 billion and by June of this year had already topped that mark, at $6.5 billion.
Entrepreneurs are encouraged by this. ''They are coming out of the woodwork like crazy, driven by the perception of available money,'' Pratt says. Both Solex Corporation, which makes its solar collectors out of plastic and synthetic rubber in Chelmsford, Mass., and Kurka Corporation, in Walpole, Mass., have been approached by venture capitalists.
Although there is more venture capital out there now than ever before, the outlook for entrepreneurs seeking start-up capital (financing to help early stages of development rather than later ones) is not as bright as last year - but it still sparkles compared with a few years ago.
Last year, a record 50 percent of investments by venture-capital firms went into start-ups, says Pratt. This year, he estimates it will be more like 25 to 30 percent.
Roy Rogers, managing partner of Hambrecht & Quist, one of the nation's top venture-capital firms, says, ''Venture-capital investments are reaching more mature stages now.'' The record number of companies financed for the first time last year are ready for another cash injection. This means ''competition will be stiff for second and third rounds of financing, making less money available for start-ups,'' Mr. Rogers explains.
John Canning, president of First Chicago Investment Corporation, another leader in venture capital, agrees. ''A tremendous amount of (new deals) were done last year. With that much money put out, (venture capitalists) will have to spend more money on them.''
Another reason venture capitalists may not be scouting quite so intensely for start-ups is that the new-issues market has been down. ''The initial public offering (IPO) market is off from last year substantially,'' says Roger Lopata, editor of Going Public: The IPO Reporter. This market generally follows the stock market, and since the stock market has been ''in a state of real uncertainty,'' so has the IPO market, he says. Consequently, many venture capitalists are building up their existing portfolios - simply because they don't have ''an exit'' for their investments, he says.
But a weak public market does mean one good thing for venture capitalists. There are better deals around. Entrepreneurs are not asking quite so much of their venture-capital financers, because the new-issues market just isn't red hot the way it was last year.
''The opportunity to get the best values is at times when the economy is in the doldrums and the stock market is down,'' says Michael Bell, president of the National Venture Capital Association. ''We're excited about the opportunities that exist in new companies now.''
With venture capitalists able to take their pick of the crop, start-up entrepreneurs will face stiffer competition. ''The way to beat competition is to present the best business plan,'' says Ronald Smith, editor of Entrepreneurs' Magazine.
According to venture capitalists, entrepreneurs should be presenting them with predicted market share, management strategy, and projected sales - instead of raving so much about their product.
Venture capitalists also say entrepreneurs in satellite communications, computer software and hardware, energy, cable TV, radio, medical products, robotics, genetics, and military equipment - and virtually anything that improves productivity - stand an excellent chance of getting venture capital.
Overall, prospects still look good for the entrepreneur, says Hambrecht & Quist's Mr. Rogers. ''Remember,'' he says, ''even when times were tough, the good companies always got financing.''