Passing the Buck
Technology companies starving for capital now have a place to go for financing
The Suburban Maryland Technology Council has taken the banks by the horns to corral their support for technology companies starving for operating capital.
Eight institutions have been roped into committing $3.5 million to the council's Technology Development Loan Fund, in effect a virtual bank. Guarantees by the state of Maryland of 80 percent of the amount financed have provided a comfort level for the coalition, consisting of NationsBank, Sandy Spring National Bank, 1st National Bank of Maryland, Signet Bank, Crestar Bank, Riggs Bank, Potomac Valley Bank and Farmers & Mechanics Bank. They offer loans ranging from $50,000 to $250,000, at rates no more than 2 points above prime, to companies pre-screened by a tech council advisory board.
"The problem of obtaining credit financing for permanent working capital, equipment and facilities is ever-present," commented Dyan Brasington, president of the SMTC. Its Incubator Advisory Board works with the banks to educate them on the technology industry and financial models appropriate to its fast-growing companies.
"The concept is a great one in terms of allowing some of the regional banks to gather more experience working within the high-tech community in things that they might normally consider to be outside of their risk profile," said Scott Stouffer, CEO of Visual Networks, a two-year-old privately financed company and the Loan Fund's first deal.
Located in the tech council incubator, the network diagnostics and management systems company is growing at the rate of one new employee per week and has just begun shipping its products. The loan, with Signet as the lead bank, will be used to finance receivables, said Stouffer.
"The loan's more important value to us is [that] it helps leverage some of our equity capital," he added. The cost of equity capital is high for an entrepreneur such as Stouffer, who must give up ownership to investors.
The Loan Fund has received four applications so far, said Brasington. One other is near approval and the remaining two are scheduled for screening by the advisory group, which also serves as the board of the council's technology incubator.
This fast start is unlikely to slow. A similar program called TechBanc was set up last February by the Technology Council of Philadelphia with Meridian Bank as a preferred provider. Despite no guarantees, Meridian has already financed six deals worth more than $6 million.
Local bankers are responding none too soon to industry demand for bank financing. Silicon Valley East, a division of the fast-growing California lender, has 300 East Coast clients and in five years has grown to represent 15 percent of Silicon Valley Bank's business.
David Fischer, an officer in Silicon Valley East's Boston headquarters, said the group, as has long been rumored, will open a Washington office by the end of the year.
The other gaping hole in technology financing -- seed capital -- is also being filled by an innovative Philadelphia-Washington solution led by the Suburban Maryland and Philadelphia tech councils.
The American Private Investors Group, a spin-off of the Pennsylvania Private Investors Group with $17 million invested by individuals, has opened offices in Bethesda, Md., to link tech deals with accredited investors. A $5,000 kitty from KPMG Peat Marwick has helped Director Sheila Lendman launch the network of more than 40 "angels," or accredited investors.
APIG screens presenters, Lendman explained. It does not do deals. If a business plan makes the screening board's A-list, the entrepreneur makes a presentation, while B-list business plans are passed around. C-list plans are cut. Applicants pay $75 to submit their plan and $75 to present.
HOW THE LOAN FUND WORKS
A loan application is made to the SMTC. It is reviewed for sufficiency and brought to the Incubator Advisory Board for evaluation of the technology and its market potential. The board then makes its recommendation to a rotating lead bank for the traditional due diligence. The lead bank then brings the application to the entire group of participating banks, where a 75 percent agreement must be reached to send the loan on for guarantee approval. Applicants must pay a $250 fee to submit an application.