Check your state for funding

Nation's Business, May, 1997 by Sharon Nelton

Companies needing money to expand might look for help from their state government, as one high-tech firm in Iowa did.

If you're scouting for capital to start or expand a business, don't overlook the possibility of help from state-government programs.

A case in point is Engineering Animation, Inc. (EAI), an Ames, Iowa, software-development company that specializes in three-dimensional visualization technology. In 1994, it applied for and eventually got $600,000 from a state-government program known as CEBA--the Community Economic Betterment Account.

Started in 1988 by two professors and two graduate students

from Iowa State University, EAI had outgrown the space it shared with about 30 other companies at the university's research park.

"Any nook and cranny that was available, they were in," recalls Mark Reinig, an economic-development coordinator with the city of Ames. In 1993, Reinig arranged for a loan of $28,000 in city government and private funds so EAI could acquire furnishings for its expanding staff. But it was clear that EAI needed a building of its own.

Fortunately for EAI, its general counsel and vice president of administration, Jamie A. Wade, was familiar with state economic-development issues and knew about CEBA, a business-assistance program aimed at creating and retaining jobs and bringing businesses to the state.

Like similar programs in many states, CEBA requires local matching funds and community participation.

"It's a real partnership," says Michael Miller, chief of the business-finance bureau at the Iowa Department of Economic Development in Des Moines. The department administers CEBA. "It's the local community demonstrating that they support the project and then partnering with the state to support that business."

Typically, matching funds equal 25 to 50 percent of the state's contribution but can be as little as 10 percent in the smallest communities.

For the EAI loan request, Reinig helped line up $350,000 in matching funds. The funds consisted of a new $50,000 loan from the city of Ames (which, combined with the balance of the old loan, brought the city's contribution and original private funding to $71,000); a 10-year, $100,000 loan from the Ames Seed Capital Fund, a venture-capital group, at half the prime rate; and a $200,000, 10-year, no-interest loan from the Ames Economic Development Commission, an affiliate of the Ames Chamber of Commerce.

With the matching funds pledged, EAI's application was forwarded to the state agency. The CEBA funding came through, although not without a glitch, says Wade. At first, in June 1994, CEBA approved only $450,000 of the requested $600,000. "That wasn't sufficient to allow us to marshal the assets for the project," says Wade.

Through further negotiations, EAI was able to demonstrate the additional growth that it expected and to clarify why it needed the full amount. The final $150,000 was approved, m the form of a no-interest loan, in January 1995.

The initial $450,000, however, was a forgivable loan--that is, if EAI, which had about 80 employees when it applied to CEBA, created an additional 150 jobs within three years, the loan would be forgiven and become, in effect, a grant. "We were exceeding [the employment goal] within one year," says Wade.

With funds from the state, the city, and the private sector as leverage, EAI secured a mortgage loan to construct a two-story, 37,000-square-foot building in the research park. EAI occupied the building last June.

EAI now has the equivalent of 275 full-time employees. It went public last year, and this year it was approved for an additional $1 million m CEBA funding

In many ways, EAI has been an ideal company for CEBA funding. One of CEBA's main thrusts is to create high-quality jobs; many of EAI's hires are college graduates in fields such as engineering and computing

CEBA dikes companies that sell outside the state, which brings money into Iowa. EAI is producing animation products for applications ranging from medicine to automobile design; the firm's diverse group of clients includes Merck & Co., the Discovery Channel, and General Motors Corp. This spring, in conjunction with IBM, EAI introduced to the retail market The Magic 3D Coloring Book, a CD-ROM that enables children to color three-dimensional scenes on their computers using Crayola hues and textures.

One of the things that persuaded the city and the state to help EAI, say Reinig and Miller, is the company's strong management team. Matthew M. Rizai, who has a doctorate in mechanical engineering as well as an MBA and experience with automotive and venture-capital companies, had been brought in as CEO in 1990. "He had the business acumen that helped [EAI] get to the next level," says Reinig. Wade and other managers added to the firm's expertise, positioning it for further growth, he says.

Applying for a state program does involve paperwork. Wade says the CEBA application is about 20 pages long. EAI had to describe what it intended to do with the funds and to provide cost projections. In addition, the company had to provide a business plan and other documentation.