Look at every option - and beyond - financing small manufacturing businesses - column

Nation's Business, July, 1991 by Thomas Hierl

When my partner and I started our company three years ago, our biggest hurdle was funding. As we acquired our financing, however, we got more than money. We learned the importance of pursuing many options at the same time. Our best opportunities for capital, we discovered, were to be found not just in the private or the public sector, but in both.

Our company had evolved from our experience at a small new company in Somerville, N.J., that made digital integrated circuits for computer operations. I was in the materials department, which grew the thin layers of crystals on top of the computer wafers.

Like many start-up firms that are capital-intensive, much of the company's equipment was frequently idle. So we opened our department to outside companies, growing crystals on computer wafers to their specifications. Although the rest of the company was failing, this department was making money, and I began to think that it could survive on its own.

In late 1988, I started Quantum Epitaxial Designs Inc. with a salesman from my department. (An epitaxy is a layer of crystal growth on an object.) We wanted to transform our profit-making segment of somebody else's firm into our own successful company.

Unsure about how to proceed, I bought a book on how to write a business plan, and I followed its suggestions. I wrote a plan identifying what we needed to run the business, and I wrote proposals to venture-capital firms. Investment firms praised the plan but said they weren't interested. Some said our technology didn't mesh with the deals they make; others said the $275,000 we sought for operating capital was too far below their multimillion-dollar deals.

Our luck began to change when a Pennsylvania state program agreed to provide us with funding through the Ben Franklin Technology Partnership, which gives qualified small high-tech firms about one-third of their necessary capital if they obtain the rest through the private sector. The partnership referred us to the NEPA Venture Fund, located in the same building in Bethlehem, Pa.

Working with NEPA was both thrilling and frustrating. Even though I had test-driven the business with my former employer, NEPA had me researching questions I hadn't anticipated. Each question and suggestion from NEPA made me take a new look at my business plan. Early in 1989, NEPA agreed to supply venture funding of $275,000, based on our getting our equipment.

Around that time, we secured space at a business incubator run by the Ben Franklin Technology Center at Lehigh University, in Bethlehem. This not only saved us money but also enhanced our credibility. The Ben Franklin program has a high rate of success with start-ups, and our double affiliation with it was like a seal of approval. It also became important in our search for equipment.

We had hoped to lease the equipment we had used at our former employer's from its leasing company. But that company wanted us to take all the employer's equipment, not just what we needed. We then had two options: buy equipment for $600,000 or lease equipment from someone else. But leasing companies were nervous about supplying their expensive and specialized equipment to start-up firms, and they wanted a guarantee--for 100 percent of the cost of the equipment. That meant we needed $600,000 whether we leased or bought the equipment. Without that much money in the bank as a guarantee, the leasing companies wouldn't touch us. Venture leasing firms, which want an equity interest, also shut us out. Finally, someone suggested we get a bank loan.

We had not pursued a bank before because we thought none would be interested in a start-up. We got the name of a bank through the Ben Franklin program; I think our participation in that program worked like an endorsement, and we were able to secure a loan--80 percent of which was backed by the Small Business Administration--at about one point over prime. The payments were less than what it would have cost to lease the equipment, so we bought.

By fall 1989, we had received the equipment. We were in business. A few months later, our company was profitable. It now has six employees, exports semiconductor material to Japan, and works with the world's biggest corporations.

In a year, we'll graduate from the Ben Franklin incubator. We need more equipment and space. We're exploring options--a state manufacturing loan program, a local economic development grant program, leasing companies, and more.

Pursuing parallel approaches in the current economy is critical. An entrepreneur can never be too busy to plan for the alternatives. While the state loan program looks ideal for our future, I've been told it will be easier to win the lottery than get state money in this economy. If that turns out to be true, we'll be disappointed--for a very few minutes. And then we'll move on to the next option.

Thomas Hierl is president of Quantum Epitaxial Designs Inc. of Bethlehem, Pa. He prepared this account with Contributing Editor Charles A. Jaffe.