Leaving no stone unturned

Nation's Business, Oct, 1997 by Sharon Nelton

Banks, venture capitalists, nonbank lenders, private investors -- these are all well-known sources of capital for small businesses. But some entrepreneurs put on their creative caps and turn up more-unusual avenues to funding.

One such entrepreneur, James W. Morentz, calls this "alternative financing." And he's a master at getting it.

Morentz is CEO of Essential Technologies, Inc., which makes software for environmental, health, and safety applications. The company, based in Rockville, Md., was formed in July as the result of a merger between EIS International Corp., a business Morentz founded, and its top competitor, EnviroMetrics Software, Inc., based in New Castle, Del. Essential Technologies has about 115 employees and expects to do close to $15 million in sales this year when combined with the earlier companies' revenues.

EIS International was a 1996 honoree in the Blue Chip Enterprise Initiative, a program that recognizes companies that have dealt with significant challenges. An annual competition, it is sponsored by Massachusetts Mutual Life Insurance Co. (known as MassMutual -- the Blue Chip Company), the U.S. Chamber of Commerce, Nation's Business, and "First Business," the Chamber's syndicated morning business-news television program.

Morentz is familiar with the stages of financing that many entrepreneurs go through, from borrowing funds on a credit card -- as EIS International, which was founded in 1975, did when it was young -- to obtaining $1.5 million in venture capital four years ago.

"One of the things that we were able to do with the venture money was to do a better job of sales and marketing, look a little bigger, be able to take a longer-term view of building a company rather than just meeting payroll," says Morentz.

Creating Opportunity

The venture capital also gave EIS International an opportunity to push an international program, which led the company to obtain financing in a particularly creative way: through upfront payments from foreign resellers for the exclusive rights to sell the company's software in a given country.

EIS International signed up resellers in more than 15 countries, including Kuwait, Israel, the United Kingdom, and Denmark. This summer, it signed Samsung Corp., South Korea's largest electronics manufacturer.

Resellers in small countries such as Holland have paid around $100,000 for territorial rights, but in 1995, NEC -- a huge company with a huge marketplace in Japan -- paid $1 million.

"They recognized that this was not just to purchase the territory, but it was purchasing our commitment to them, and it was purchasing, in many ways, the product-development standards and resources that NEC would be comfortable with," says Morentz. "That was money invested in us and that we invested in turn in improving everything from our quality control -- which was essential to NEC -- to just being able to put somebody on a plane and fly them to Japan anytime that somebody needed it."

Morentz had seen the idea of exclusivity payments work for a computer-hardware product and decided to try it with software. Working with an international consulting company -- Global Business Access Ltd., based in Washington, D.C. -- he lined up a couple of smaller deals.

"By the time NEC came along, we had an existing contract that we were able to say, `This is the way we deal internationally,"' says Morentz. "Then it was really just a matter of negotiating the amount." NEC, like the other resellers, pays a minimum annual fee to maintain exclusivity right -- "sort of a prepayment of royalties," says Morentz.

NEC sells systems-integration, hardware, and other products around the EIS software, and Morentz says that NEC was pleased enough with its relationship that it bought a small equity stake in the newly merged company.

Speeding Development

In what Morentz calls "another unusual form of financing" for Essential Technologies, NEC is putting software engineers on-site at his company to help speed development of next-generation products. (The number of NEC engineers on hand varies, but there were seven in one recent week.) The benefit to Essential Technologies, says Morentz, is that it does not have to hire additional engineers to hasten development; the benefit to NEC is that it pays a lower royalty when its engineers are at Essential Technologies.

Negotiating upfront exclusivity payments is not for every company. "If you have a product in demand, especially where there is not very much competition, then an exclusivity payment has not that hard to extract from people," says Morentz. No one is going to pay upfront for exclusive rights to the 25th wordprocessing program, he says. "But in our business, in crisis management, and increasingly in environmental health and safety, we have something that no one else has."

Even if you have the right product, it takes time and money to work through the process. EIS's negotiations with NEC spanned three months, which in Japan is considered a short duration for such talks. There were 20 face-to-face meetings between NEC's people and EIS's people or its consultants. The shortest of those meetings, says Morentz, ran from 8:30 a.m. to midnight.