Lender, investors help root budding businesses
An effort by the Alaska Industrial Development and Export Authority, the state development financing corporation, to use some of its funds to attract venture capitalists to Alaska has had disappointing results.
"What we learned from that is the Alaska investment deals were too few and too small to interest most traditional venture capitalists," said Deborah Marshall, who heads InvestNet, a Juneau-based nonprofit that connects investors with Alaskan entrepreneurs.
David Hoffman, president of Alaska Growth Capital BIDCO Inc., a type of development bank, pointed out that most Alaska business owners would rather finance their early stage development with debt if they can.
"They’d rather not give up control if they can avoid it," he said. Alaska Growth Capital can do equity investments but most of its financings are loans, Hoffman said.
Alaska Growth Capital was formed in 1997 to operate as a BIDCO, a form of development bank authorized by state laws in about 30 states including Alaska. It is a subsidiary of Arctic Slope Regional Corp. of Barrow,
BIDCOs lend money mostly to small business start-ups and expansions and can take an equity position in the deal, which commercial banks in the United States cannot do.
Alaska InvestNet, a nonprofit service formed two years ago, matches hopeful Alaska entrepreneurs with potential investors in Alaska and the Lower 48. InvestNet is operated by the Juneau Economic Development Council, but it maintains an office in Anchorage and its services are statewide.
Both initiatives were largely initiated through efforts and financing from the Alaska Science and Technology Foundation. ASTF, a state agency formed to stimulate economic development, particularly in higher technology fields, is still involved in both efforts.
ASTF has given InvestNet $270,000 in grants over three years. Three million dollars in loans from the foundation were combined with private investment, mostly from the Arctic Slope corporation, to provide the initial $7 million in capitalization for Alaska Growth Capital.
Citing confidentiality, Marshall and Hoffman declined to identify details of specific deals except where the information has been made public by the businesses.
"Deals have come together, big and small," Marshall said. "I’m not privy to the details, other than what they choose to tell me."
Alaska InvestNet’s main showcase for Alaska entrepreneurs is an annual conference where selected entrepreneurs make presentations to potential investors. This year’s Capital Investment Conference is planned for March 22-23 in Anchorage.
These are successful, but Marshall is now supplementing them with smaller sessions held more frequently through the year. Typically, two selected entrepreneurs pitch their ideas in a breakfast meeting with potential investors.
"We pre-screen the investors. They have to have at least $1 million they’re willing to invest, so the entrepreneurs we work with know they’re dealing with people who actually have money," Marshall said.
Likewise, the entrepreneurs are prescreened. Marshall goes through the business plans submitted to her and selects the best ones for the presentations.
Entrepreneurs using the service pay a $250 yearly fee. Venture capital investors pay a $500 annual fee to participate. InvestNet receives no fee for deals that are made.
Alaska Growth Capital has a different focus, but the goal is similar to InvestNet in early stage financing.
"We can do equity deals but we are mainly a lending institution, and we prefer that," Hoffman said. "We specialize in higher-risk loans to start-ups or firms in early stages of growth.
"We don’t necessarily require our borrowers to be in business, but a person starting a business must have experience in the field," he said.
Unlike a conventional bank, Alaska Growth Capital’s loans don’t have to be backed by collateral, "although we like to see some collateral," Hoffman said. "What we look at mainly is the quality of the business plan and the projected cash flow."
Rates for loans from Alaska Growth Capital aren’t cheap, Hoffman said. They reflect the higher risk.
Alaska Growth Capital is now in its third year, and its lending may hit $10 million this year, after $6 million in the first year and $8 million in the second year, Hoffman said.
"It’s an amount of annual lending that can be sustained indefinitely with our present capitalization and our ability to leverage funds," Hoffman said. As other financial institutions do commonly, Alaska Growth Capital sells loans that are guaranteed by the U.S. Small Business Administration and U.S. Department of Agriculture rural development program.
"There’s a good market for guaranteed loans, and it frees up our capital to do more lending," Hoffman said.
One fundamental difference between Alaska Growth Capital and conventional banks is the time its staff spends with prospective lenders, both before and after the loan is closed. The firm receives some government grants and much of this pays for added costs of serving remote communities and the hands-on assistance that is provided.
However, relationships with commercial banks are crucial, Hoffman said. Alaska Growth Capital creates business for banks by helping new firms through their earlier stages, after which they turn to conventional sources of finance.
Likewise, banks bring potential clients to Alaska Growth Capital, Hoffman said.
Marshall said one of InvestNet’s key missions is education. Her group sponsors seminars on preparing strategic plans, how to value their firms and how to structure stock sales.