February 1, 2010
By Jessica Santina, Nevada Business
Cultivating the â€œBenjaminâ€™sâ€
by Jessica Santina
According to economists, only Michigan has suffered worse from the Great Recession than Nevada. Nevadaâ€™s too-heavy reliance on gaming, sales tax and construction led us to this situation and economic development is on everyoneâ€™s mind.
But how do you build, grow and sustain diverse types of businesses in a state with no money?
No Silver From the State
While there are arguably many benefits to a lack of government interference, from an economic development perspective, this can be problematic. Such investment could, perhaps, enhance Nevadaâ€™s ability to draw high-quality, job-creating businesses.
According to those working in the trenches, this stipulation is fairly unique among states, and might possibly be complicating the recessionâ€™s effects further in Nevada.
â€œAnecdotally, I hear from companies that New Mexico, Arizona and Utah are doing a lot more, providing loans and things, and people are somewhat acidic in their attitude, being frustrated with not being able to find money,â€ said Chuck Alvey, president and CEO of the Economic Development Authority of Western Nevada (EDAWN). â€œThese people hear the state talking about needing to develop renewable energy and so forth, but the state wonâ€™t give them money to do it, so they see it as idle talk.â€
Such talk has twice in recent history led to ballot questions designed to change the Constitutionâ€™s ruling on the matter. â€œIt failed both times, I think, because people didnâ€™t understand it,â€ said Alvey, adding that there is no hard research that he knows of indicating that the rule has significantly affected economic diversification in the state.
There are other issues complicating the struggle to find capital in Nevadaâ€”namely, that other traditional sources of funding are missing here, due to a general lack of competitiveness.
â€œWe donâ€™t have a major venture capital (VC) firm located in Nevada,â€ said Dave Archer, CEO of the Nevada Center for Entrepreneurship and Technology (NCET), which he describes as a sort of â€œclearinghouse for programs available for starting or growing businesses in Nevada.â€
â€œVenture capitalists tend to invest in businesses that are geographically close by, usually within an hour or so driving distance. So the magnitude of investment is affected.â€ Archer explains that angel investors tend to invest up to about $1.5 million, while venture capitalist investment usually begins at $1.5 million; basically, that significant multi-million dollar investment is lacking in the state.
Why no venture capitalists in Nevada? Itâ€™s a chicken-or-egg debate; many say there simply arenâ€™t enough of the kinds of businesses that VCs like here, though itâ€™s arguable that there might be, if there were a VC firm nearby.
â€œOur state hasnâ€™t been focused on those highly scalable organizations that can be highly ramped up with products or services that are universal, like software or medical devices, which can be marketed nationwide or worldwide,â€ explained Dennis Wengert, deputy director for the Nevada district of the Small Business Administration. â€œWe arenâ€™t a state thatâ€™s historically been conducive to that. There hasnâ€™t been a state or private infrastructure from a financing point of view, so those companies arenâ€™t attracted here.â€
Compounding the problem is Nevadaâ€™s economy; the Silver State is in too much financial trouble to think beyond subsistence funding. â€œThere isnâ€™t an appetite or ability to devote funds to that kind of economic development activity when local leadership is concerned with providing basic services â€¦ So I think itâ€™s been somewhat of a detriment to diversifying the economy and attracting high tech here,â€ Wengert added.
Traditional Lending Sources
â€œWeâ€™ve got a public perception that a company in survival mode should get a loan,â€ said Wengert. â€œBut in the last two years in Nevada, so many companies have been in survival mode, trying to get loans, while banks are in the business of loaning to expansion-mode companies.â€
Wells Fargo, the nationâ€™s largest small business lender, considers â€œthe Five Câ€™s of Creditâ€ before offering a business loan, explained Nevadaâ€™s Vice President of Communications, Natalie Brown. These are: 1) Character (What impression does your credit make on the lender, or how trustworthy is your credit record?); 2) Conditions (How, precisely, will the money be used?); 3) Capital (How much of your own capital have you invested in the business? â€œHaving your skin in the game sends the message that you are committed to making your business succeed,â€ said Brown.); 4) Capacity (How, precisely, will you repay the loan?); and 5) Collateral (What forms of repayment security can you provide the lender?) A sixth â€œCâ€ may play a significant role as well; longtime Customers may fare betterâ€”a preference thatâ€™s fairly standard among bankers.
Bill Uffelman, president and CEO of Nevada Bankers Association, said that while the perception is that banks arenâ€™t lending, the problem lies with loan applicants, and a general lack of interest in what theyâ€™re selling.
â€œPeople arenâ€™t spending money; even people who are doing okay financially are sitting tight, reluctant to spend money because their neighbors got laid off and theyâ€™re wondering whether theyâ€™re next. So thereâ€™s a question of confidence, and a lack of spending. Thatâ€™s resulting in a lack of credit-worthy projects, and borrowers who wouldnâ€™t just be digging themselves further into debt,â€ said Uffelman. â€œAnd Iâ€™m not going to make a speculative loan as a banker. Iâ€™d be called up short by regulators and stock holders. If you have a track record as a successful business person whoâ€™s made good decisions, and youâ€™ve banked with me for 15 years, Iâ€™d probably be more willing to make that loan. And with the Small Business Administration (SBA) guaranteeing a percentage, Iâ€™d be even more willing.â€
To make lending more palatable, the SBA reduces risk by guaranteeing two types of third-party business loans: 504 loans geared toward hard, durable assets, and 7(a) loans intended for all other capital needs. Through the American Recovery and Reinvestment Act (ARRA), guarantee levels were increased to 90 percent through 2009, although thereâ€™s a movement within Congress to reinstate and extend that increase.
â€œItâ€™s important to understand that banks want to lend,â€ said Uffelman. â€œThe problem is finding borrowers who want to borrow, with qualified projects and qualified credit.â€
Wengert said that 75 percent of Nevadaâ€™s community banks lost money during the third quarter of 2009. â€œThatâ€™s a lot of lending capacity sitting on the sidelines because they canâ€™t take the risk of making loans in an uncertain economy, where many indicators say we havenâ€™t truly reached bottom yet.â€
Connections to Capital
Additionally, the NCED serves as a referral hub to other capital sources or organizations offering business assistance. Executive Director Michael Skaggs says the NCED is closely monitoring the state economy, and has found that the national credit crisis has affect Nevadaâ€™s ability to draw and retain businesses.
However, Skaggs alludes to an uptick in foreign investment that he and Lieutenant Governor Brian Krolicki have helped to brokerâ€”in particular, from the Chinese. â€œRecently, about 25 business people from China flew here and we put technologies in front of them,â€ said Skaggs. â€œWeâ€™re showing them things that are economic stimulus-types of businesses, so weâ€™re matchmaking â€¦ foreign sources are one way, I think, that weâ€™ll get out of this mess.â€
â€œWeâ€™re an early stage investor,â€ said President and CEO Jim Croce. â€œWe provide money and support in the form of commercialization services, and take equity in companies, working with them to raise public and private capital. So weâ€™re a long-term investor, and weâ€™re very hands-on. Our mission is to accelerate the process of taking these clean energy innovations from the lab to the marketplace.â€
After making an up-front capital investment (typically around $150,000), NIREC assigns an entrepreneur-in-residence or seasoned business person to work alongside the inventor to ensure that the technology continues reaching milestones, a thorough business plan is formed and impressive presentations can be made to angel investors.
â€œClean energy projects continue to enjoy a good level of both public and private sector support. Globally, it has grown [five-fold] between 2004 and 2008 â€¦ Clean energy, for the first time ever, became the fastest growing segment of venture capital, ahead of software and biotech, in the third quarter of 2009,â€ said Croce. Still, renewable energy isnâ€™t always fail-safe in securing capital; 2009 should see a year-to-year drop of 20 percent in worldwide investments.
â€œWe have a number of challenges in Nevada in terms of competitiveness in attracting private capital and trusted entrepreneurs who effectively manage money. We have a long road ahead in terms of becoming competitive with other states who are actively stimulating investment,â€ said Croce. â€œIâ€™d say Nevada needs to really get more organized as a state as to how we build up early-stage capital formation.â€ Croce adds that with the 2009 investment drop and no venture capital here, many needed technologies arenâ€™t making it to the marketplace, translating to missed economic opportunities.
Funding for Micro-Businesses
Additionally, as an SBA resource partner, NMI hosts the stateâ€™s only microlending program, utilizing SBA funding to offer loans of up to $35,000 to startups or existing businesses. Any type of microbusiness (a business with 5 or fewer employees that lacks access to conventional lending sources) is eligible, except for adult entertainment, gaming, real estate investment and multilevel marketing.
How can NMI afford to take such a risk? â€œWe canâ€™t afford not to,â€ said Siefert, pointing to a 2007 study that found that 193,000 businesses in Nevada are microbusinesses. â€œWithout this program, where do they go? They canâ€™t surviveâ€”especially now.â€ Thanks to the NMIâ€™s thorough counseling, defaults on these â€œriskyâ€ loans are only about 7 percent.
Bridging the Gap
Upon graduation from the University of Nevada, Reno, Good saw a need to bridge the gap between idea and industry. â€œTypically, entrepreneurs donâ€™t know how to take their ideas to market, how to find funders, etc.,â€ he said. â€œMost investors are looking for steady deals, and most entrepreneurs are looking for capital and advice. Combining the two provides a vehicle that enables investors to see companies and reduce their risk.â€
C4CUBEâ€™s access to investors around the country makes them an important connection for business owners. Additionally, Good and Executive Director Norman Smith have established a Reno chapter of the U.S. Angels, a Palo Alto-based angel investor group, and are working to eventually bring a venture capital firm to Nevada.
Botts explains that, unlike VCs, which tend to invest in lower-risk, higher return propositions at a later stage in a companyâ€™s development, angels invest earlier on, taking on greater risk for potentially higher returns. â€œAngel investors are looking automatically at about a 50 percent failure rate,â€ Botts said. â€œYouâ€™re all hoping for one home run.â€
Obviously, the likelihood of eventually making those returns keep angels investing. But Botts points to another reason: â€œA number of members in most angel groups have built companies and want to give back to their communities. Theyâ€™ve been successful and know they can help.â€
Itâ€™s also possible to tap 401k and IRA accounts for needed capital, depending on how the accounts are set up, explained Stephen Brock of Public Company Management, a Las Vegas-based consulting firm that specializes in helping small businesses raise capital. â€œIndividuals can self-direct a portion of their retirement funds into startups that are building themselves to go public, so they can receive stock certificates with their self-directed funds,â€ said Brock. Because this is a complicated process, an investment advisor would need to guide anyone interested through the process.
Brockâ€™s specialty, however, is in helping companies to become IPOs in order to raise capital through the Nevada State Registered Offering (NSRO) programâ€”Nevadaâ€™s answer to providing its businesses with investment capital. Through the NSRO, companies can legally register and distribute shares of company stock to Nevada residents and qualified visitors. Though not for everyoneâ€”eligible companies must have $1 million in sales with the prospect of $2 million by trading timeâ€”the NSRO makes it possible for certain companies to raise up to $1 million in just months.
Though such a program isnâ€™t unique (many states have similar offerings), Nevada doesnâ€™t place restrictions on who can invest in what; issuers are simply required to disclose their financial information, and investors are left to their own devices to determine where, and how much, to invest. Plus, Nevada allows companies to advertise stock sales, which is forbidden elsewhere.
â€œThrough this route, companies can use their stock for compensation, expansion dollars and benchmarks for how theyâ€™re doingâ€”if youâ€™re private, itâ€™s hard to know what youâ€™re worth,â€ explained Brock. â€œYou can also use the stock to buy out other companies, so having the stock allows you options, where being private limits you. But itâ€™s not for everybody.â€
Itâ€™s not for every investor, either. After all, many such companies have been turned down by other lending sources. â€œIf a company has a way to show the investor how to get their money back and then some, it should have a better response,â€ said Brock, pointing out that through the process of filing for the NSRO, and being under the SECâ€™s watchful eye, a company is vetted and deemed viableâ€”not that there arenâ€™t companies that abuse the system. â€œIn any investment, you should do your research. You canâ€™t rely on good tips, or the fact that everyone is running for the same investment. You should always do your due diligence and decide if the companyâ€™s management is right for you.â€
Plus, many believe better financial times are around the corner, which may make raising capital a bit easier. â€œOnce people see new housing, visitor volumes picking up and unemployment lowering, I think the demand situation will turn around and the lending environment will become closer to normal,â€ said Wengert.
â€œIâ€™m not an economist, but what I sense is that thereâ€™s pent-up demand,â€ said Chuck Alvey. â€œInvestors have been sitting on the sidelines, and Iâ€™m sensing that itâ€™s coming together. They donâ€™t want to sit on their money anymore.â€