Power Play

Money Matters

According to VentureOne Corp., an investment research firm in San Francisco, venture capital companies raised a record $10 billion last year. The good news for technology-based businesses is high-tech companies were among the primary recipients of this venture capital. IT companies pulled in the lion's share of those funds, with a whopping 59 percent. Businesses in the life sciences fields, which also include technology-based companies, brought in 22 percent of the funding, while nontechnology companies took in the remaining 19 percent.

Throughout the last five years, software start-ups, particularly those involved in networking, communications and the Internet, have continued to attract the largest share of venture capital funding, says Jesse Reyes, director of Venture Economics Information Services, the venture capital research and consulting division of Securities Data Co. in Newark, New Jersey. This trend is expected to continue well through the end of this year.

Interactive Learning International Corp. (ILINC), a distance-learning software company in Troy, New York, is one company benefiting from the torrent of venture capital funds making its way to high-tech businesses. (Distance-learning software allows companies and schools to offer training sessions and courses to off-site employees and students.) Last year, ILINC received $1.75 million in venture capital funding from Geocapital Partners, a Ft. Lee, New Jersey-based venture capital firm specializing in IT investment.

"Geocapital approached us and was very eager to make an investment in the distance-learning market," says Jim O'Keefe, ILINC's CEO. "They were aggressively pursuing IT placement."

Still, experts say the sobering fact for high-tech entrepreneurs who aren't in the hot industries, such as the Internet and distance learning, is this: Venture capital funding is probably out of their reach. Even though funds are more plentiful than ever, the majority of venture capital firms are looking to invest large sums of money in well-established companies with proven track records, leaving the majority of high-tech start-ups and most small companies, in effect, out of the loop.

To address this gap, a host of government, state and regional programs have emerged to foster economic development, furnish costly research and development (R&D) funding, and provide access to risk capital, says Rice. Among them is the Small Business Innovation Research (SBIR) program, which provides grants or contracts for small high-tech companies in the start-up and development stages. Each year, 10 federal departments and agencies, including the National Science Foundation, the Department of Energy and the Environmental Protection Agency, are required by the SBIR to reserve a portion of their R&D funds to award to small businesses. Approximately $900 million was given to small technology companies in the last two years.

Another bright spot for high-tech financing: More private investors, often referred to as "angels," have stepped up to the plate to back technology-based businesses in recent years. "Angel investors are really carrying the weight for early-stage investing [in technology-based companies]," says Gerald Benjamin of International Capital Resources, an investment banking and capital sourcing firm in San Francisco, and author of Finding Your Wings: How to Locate Private Investors to Fund Your Venture (John Wiley & Sons).

Rather than dealing with venture capitalists--who have a reputation for being too controlling and too interested in short-term returns--many high-tech entrepreneurs are cutting out venture capital firms in favor of capital from angels. To their advantage, angel investors typically furnish small businesses with start-up capital, a long-term vision--and a whole lot more.

"The beauty of working with angel investors is that they provide more than just money," says Benjamin. "They provide extensive expertise, contacts and knowledge of investing from an investor's perspective to help raise further money. They are also able to be more closely involved, unlike venture capital firms."

Having an angel watching over you isn't always a blessing, though. "Whenever you let investors in," warns Benjamin, "you [face] the issue of control, and for many entrepreneurs, this is a critical problem."

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This article was originally published in the June 1997 print edition of Entrepreneur with the headline: Power Play.

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