Sunday, August 27, 2000

Need an investor? Try your bank

By Jan Norman
The Orange County Register

        If you're looking for an equity investor for your small, fast-growing firm, you probably won't go to your bank. But maybe you should.

        Safety Associates in Tustin, Calif., recently received a $1.5 million investment from a subsidiary of Bank of America and Tennessee-based Capital Across America.

        The subsidiary, Banc of America Small Business Investment Co., is part of a small but growing federal program that provides equity, long-term loans and management assistance to small businesses that create jobs, innovative technologies and global competitiveness.

        The number of SBICs has more than doubled to 356 since the foundering program was revamped in 1994.

        SBICs aren't Santa Clauses. They're private investment firms that expect to make a profit on their deals.

        Licensed by the Small Business Administration, they must have at least $5 million to get started and can sell SBA-guaranteed securities worth three times their private capital.

        For banks, wholly owned SBICs enable them to make investments in small businesses that government regulations would otherwise prohibit.

        Nations Bank, which bought Bank of America, has had an SBIC license since the 1980s, said Dabney Smith, vice chairman of Banc of America SBIC, “but 1994 is when we really started using it to make a difference in communities where we do business.”

        Banc of America especially looks for companies owned by women, minorities or disabled veterans, or those located in disadvantaged or rural areas, he said.

        Although it has put $30 million into 60 companies, Safety Associates is its first Southern California investment.

        Banc of America isn't alone. Forty companies in the SBA's Santa Ana, Calif., district alone have received investments totaling almost $77 million in the first six months of this fiscal year, compared with $95 million in all of the previous year.

        But before you go knocking on any SBIC's door, consider the experience and qualifications that caught Banc of America's attention at Safety Associates.

        Dr. Virginia Gordon is a toxicologist with extensive academic and business experience.

        In 1995 she and lawyer-husband Ben Root started sifting through a multitude of commercial opportunities for basic research in medical-diagnostic testing.

        But rather than rely on her own knowledge, she consulted her scientific advisory board and separate business board of directors.

        “Food companies talked (to Safety Associates) most about quality,” Ms. Gordon said. “What happens when you lose quality, you lose shelf life and nutritional value.”

        Previously, testing could take days and might be inaccurate.

        “It was clear that the food industry needed faster, simpler, more reliable testing methods,” Ms. Gordon said.

        Safety Associates started with two rounds of financing from family and friends totaling $800,000.

        That money paid for research to develop SafTest, laptop-size equipment and tests for quality that can be done by anyone in as little as 10 minutes.

        To attract investors, Ms. Gordon knew she would have to concentrate on a few segments of the food industry. Young companies don't have the time or money to market to everyone.

        “We looked where quality is critical: pet food, baby formula, food-refining industry and fried foods,” she said.

        Once Safety Associates was ready to take SafTest to market, a financing expert led Safety Associates to Capital Across America and Banc of America. Though not yet profitable, the company has revenues of almost $1 million.

        “They specified that they weren't interested in R&D. They wanted commercialization of the technology,” Ms. Gordon said.

        “Women in business was part of their focus, so I think that was critical in identifying us.”

        Mr. Smith agrees, but emphasizes that is just one factor.

        “Safety Associates came to us with a strong management team, outstanding business plan, a proven product that helps people and tremendous potential for growth.”

        Ms. Gordon won't specify how much ownership Banc of America and Capital Across America received for their $1.5 million, but it's less than 50 percent.

        Safety Associates has also demonstrated a willingness to listen to its customers, advisers and investors.

        At one point, SafTest grouped tests for numerous factors giving results in an hour. Customers said they'd rather test for one thing and get results in 10 minutes. Safety Associates complied.

        The advisers have helped define the type of companies to target and testing to develop. And now the company invited its newest investors to name a representative to the board of directors. Capital Across America's Chris Brown took the seat.

        Don't even think of approaching an SBIC without a business plan, advises the National Association of Small Business Investment Companies. Banc of America gets referrals from loan officers of the parent company, clients and other venture funds, said Mr. Smith, its vice chairman.

        “We encourage companies to go through normal channels of their regular banker,” he said.


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