Small business start up grants

Roger Lame has had so many problems trying to raise money in Baton Rouge, the LSU biological sciences professor and entrepreneur is considering moving his biotechnology company to another state.

"The worst business decision I've made was fighting to stay in Louisiana," said Lame, who founded Anomeric Inc. in 1994.

Anomeric, which has developed a diagnostic test that rapidly detects the presence of bacteria or a virus in humans, is like a lot of young companies in Baton Rouge.

Unable to attract financing from early-stage investors and striking out with local institutional venture capital companies, the eight-year-old start-up is stuck in a financial quandary.

Early development of the company was aided by accumulating $715,000 from stan-up investments, loans and grants. But that only took Lame's ideas so far.

Anomeric now wants to raise $5 million from bigger investors to launch a national marketing campaign. Its best prospects have tumed up in Dallas and Alberta, Canada.

But Laine hasn't had any luck tapping into the area's loose network of wealthy individual investors, known as angels. Pitches to the handful of institutional venture capital firms in New Orleans and Baton Rouge have been equally unproductive.

"We make presentation after presentation and never hear back from anyone," Lame said. "We're going to be forced to leave Louisiana if we don't get $5 million or $6 million within the next six months."

Yet Laine's company is farther along than many other Baton Rouge start-ups. For most companies, it is especially hard to find investors willing to pump sums up to $1.5 million into bright, new ideas.

"Seed and early-stage capital is the hardest money to find--and for the most part it's nonexistent in the state of Louisiana," said Doug Lee, executive director of the Louisiana Technology Park at Boo Carre.

That's because finding angel investors--the early-stage financial life support of most start-ups--is difficult, if not impossible here.

Making a bad situation worse, last year's stock market decline coupled with the bubble bursting on dot-corns in 2000 left many previously well-heeled angels skittish toward high-risk investments.

"I've got a better shot at getting a company $5 million than I do $50,000," said Charles D'Agostino, executive director of LSU's Louisiana Business and Technology Center, a small business incubator. "A lot of investors have crawled back into their cocoons and don't want to do anything."

There are a few would-be angels in town, but because they're not organized, entrepreneurs struggle to make the right connections. The LBTC is among several groups trying to establish angel networks in the Baton Rouge area.

"These people don't like to be organized as a group," said Tom Adamek, president of Stonehenge Capital Corp., a local venture capital firm. Adamek has seen efforts to organize angels fail. "They just don't want to get together and share deals."

Many in the local technology and small business sector say the lack of an active angel network has stymied efforts to diversify the state's economic base and stunted the growth of Baton Rouge's nascent high-tech industry.

"I'm not sure people realize what's at stake here. If small business doesn't have a way to tap into angels, then real economic development in the state is at risk," said Tony Martinez, director of the LBTC's Small Business Development Center.

Angel investors are proving to be the missing link.

Many start-up ventures are born with entrepreneurs dipping into their own assets or raising money from family and friends. Some have even financed deals by running up charges on their personal credit cards. That's usually enough to get the business off the ground, or cover product development costs, but little else. To go farther requires a second cash infusion, particularly in the technology and bio-medical sectors.

This is where angel investors enter the picture, providing the financing necessary until a bank or institutional venture capital firm, like Baton Rouge's Stone-henge or Source Capital, bankrolls the company through later stages. There are a handful of early-stage venture capital companies out there but almost all are either region- or industry-specific.

Currently there are no regional seed funds in this area, though several entities, including LSU, have discussed starting one. Amongst the institutional firms doing business in the state, most, like New York's VCE Capital Inc. are involved in technology and biomedical ventures.

Without angel investors, the flow of deals can slow to a trickle, which explains, in part, why venture capital companies funded just six deals, for $16 million, in Louisiana last year, according to a PricewaterhouseCoopers-Moneytree survey. None of those were Baton Rouge-based businesses. Nationally, institutional firms pumped more than $37 billion into companies.

The problem has existed for years in Baton Rouge, according to Howard McMurrian, head of P&N Consulting, a division of Postlethwaite & Netterville, the major public accounting firm.

"We've been involved with several start-ups and it has been very, very difficult to attract that early seed money," McMurrian said. "Angels are out there, but good luck trying to find them."

Compounding the problem, the Louisiana Department of Economic Development has 10 different loan assistance and investment programs through its Louisiana Economic Development Corp., but all are co-investment or dollar-match programs. Without private investment dollars, state monies are unavailable.

While some, like Lee at the Technology Park, argue the state should provide direct early-stage financial assistance to start-ups, others argue such programs in other states have yielded mixed results.

Ross P. Barrett, a Louisiana native and president and chief operating officer of VCE Capital, is among those who believe states should avoid the practice of funding private ventures directly. He says tax credits are a better way to stimulate investment.

Oklahoma, for example, has used tax credits as a way to encourage investment in start-up companies and create a cluster of angel networks. Individual investors pool their resources and distribute early-round financing to new businesses. "Not only do they have equity in the fund but they get tax credits," said Barrett. "It encourages angel investment."

In Puerto Rico, angel investors and others earn a 25 percent tax credit on investments in start-up corporations. If the new business fails; the investor can claim an additional credit, as much as 75 percent.

"There are different ways to do it, but the bottom line is we've got to get angel investors into the game," said Martinez, of LBTC. "If not, we're going to lose companies to other states. In fact, it's already happening."

Laine and Anomeric, one of the state's first real biotechnology companies, may be the next to go.

Anomeric's now-or-never attitude is largely because the Mayo Clinic, one of its customers, is scheduled to publish a favorable article this summer about the company's fungus test, claiming it's superior to anything else on the market in detecting chronic sinusitis (infected or inflamed sinuses).

"We desperately need the money to launch a marketing campaign at the same time the article comes out," says Lame, who was involved in a pharmaceutical start-up in San Francisco in the late 1980s. That company, Glycomed Inc., went public in 1991 for $150 million.

"Something needs to happen soon because we're almost out of options in this state," Lame says.