The search for capital

Nation's Business, April, 1986 by Andrew J. Sherman

The Search For Capital

The Sinai desert is unbearably hot during the day and very cold at night. During combat there, it has been especially difficult to store and transport blood needed for wounded soldiers at specified temperatures. So when a visiting Army Medical Corps general saw an advanced refrigeration system tht did just that for the Israeli Army, he wanted the same product for the United States. Herman Lando, president of Bilan, Inc., in Kalamazoo, Mich., had an identical product and learned of the Medical Corps' interest through an Israeli business associate.

The initial demonstration at Fort Detrick in Frederick, Md., went well, and hopes for a major contract ran high. But there were a few kinks to be worked out, and the Medical Corps asked for additional research. That was in 1978. Eight years later, Lando is still trying to develop a system acceptable to the Defense Department.

"The interest is there," says Bilan Vice President Ron Cross, who joined the company in 1980 and has been searching for venture capital ever since. "Research and development has virtually stopped because we've simply run out of money for this project. Herman has put in over $1.5 million of his own money just to keep the project alive. "We've cut our staff back from 25 to seven employees and moved to a much smaller facility."

Cross tried traditional sources of capital--commercial banks, economic development agencies and venture capitalists--without success. He also tried friends, relatives, local investors, attorneys and accoutants. The last straw was when, he says, one economic development officer visited the plant, borrowed $70 and paid it back with a bad check.

"We're not looking for charity," Cross says. "But private investors and venture capitalists have given us offers that are simply unrealistic, because they want either too big a piece of the company or too high a return on their investment. The financial institutions we've contacted to take one look at our balance sheet and decide they are not interested, without investigating further. Our local bank just revoked a $100,000 line of credit because they were having troubles, even though we've never missed a payment."

Bilan's story is not uncommon. Many entrepreneurs and small business owners find out the hard way that capital is the lifeblood of any business. Whether the money is needed to finance a new company, facilitate growth or simply fuel existing operations, finding it is never easy.

Many small business owners are looking to this year's White House Conference on Small Business for proposals that will provide more affordable access to capital. Almost three fourths of 57 state conferences (large states have several) leading up to the national conference beginning August 17 have been held.

The proceedinsg are an open forum for small business leaders to voice their concerns and formulate legislative and policy recommendations, which will in turn be developed into final recommendations for Congress and the administration. Each state will be represented by a delegation of small business owners elected by their peers at the local conferences.

The need for accessible and affordable capital continues to top the list of high priority recommendations.

"Despite the variety of entities in the financial industry, no real pools of capital are available to finance the day-to-day needs of the small business owner," observes Susan Winer, president of Stratenomics, a Chicago-based financial and strategic planning consulting firm, and cochairperson of the Illinois delegation. "Anywhere from $25,000 to $250,000 is often needed for operating capital, to pay off debts or to finance inventories. Venture capital companies are usually not interested in these kinds of deals."

A host of different finance recommendations have surfaces at the state conferences.

One calls for refining the federal and state securities laws that regulate private offerings of securities.

The Small Business Incentive Act passed by Congress in 1980 has helped resolve some of the capital formation problems that small firms encounter. And in 1982 the Securities and Exchange Commission promulgated Regulation D, which allowed small, private offerings certain exemptions from registration and disclosure requirements. However, offerors must still comply with state "blue sky" laws that create additional regulation and paper work burdens.

Confereees have supported the Uniform Limited Offering Exemption, a proposal that would streamline and harmonize federal and state securities laws. However, it is up to the state legislatures--not the federal government, target of the White House Conference--to adopt the prioposal. Many legislatures have done so.

"The Small Business Incentive Act served as a base from which small business capital formation could take a leap forward," says Jerry Feigen, a Small Business Administraton expert on venture capital. "It focused the attention of the Securities and Exchange Commission on the small business community. Bridges have been built, but problems still remain."