[Senate Hearing 107-484]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 107-484
 
                 ENTREPRENEURIAL COMPANIES: THEIR NEEDS
                   AND CHALLENGES IN TODAY'S ECONOMY

=======================================================================

                             FIELD HEARING

                               BEFORE THE

            COMMITTEE ON SMALL BUSINESS AND ENTREPRENEURSHIP

                          UNITED STATES SENATE

                      ONE HUNDRED SEVENTH CONGRESS

                             FIRST SESSION

                               __________

                           SEPTEBER 10, 2001

                               __________

    Printed for the Committee on Small Business and Entrepreneurship


 Available via the World Wide Web: http://www.access.gpo.gov/congress/
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            COMMITTEE ON SMALL BUSINESS AND ENTREPRENEURSHIP

        .........................................................

                      ONE HUNDRED SEVENTH CONGRESS

                              ----------                              
                 JOHN F. KERRY, Massachusetts, Chairman
CARL LEVIN, Michigan                 CHRISTOPHER S. BOND, Missouri
TOM HARKIN, Iowa                     CONRAD BURNS, Montana
JOSEPH I. LIEBERMAN, Connecticut     ROBERT F. BENNETT, Utah
PAUL D. WELLSTONE, Minnesota         OLYMPIA J. SNOWE, Maine
MAX CLELAND, Georgia                 MICHAEL ENZI, Wyoming
MARY LANDRIEU, Louisiana             PETER G. FITZGERALD, Illinois
JOHN EDWARDS, North Carolina         MIKE CRAPO, Idaho
MARIA CANTWELL, Washington           GEORGE ALLEN, Virginia
JEAN CARNAHAN, Missouri              JOHN ENSIGN, Nevada
    Patricia R. Forbes, Democratic Staff Director and Chief Counsel
               Emilia DiSanto, Republican Staff Director
               Paul H. Cooksey, Republican Chief Counsel
                            C O N T E N T S

                              ----------                              

                           Opening Statements

                                                                   Page

Kerry, The Honorable John F., Chairman, Committee on Small 
  Business and Entrepreneurship, and a United States Senator from 
  Massachusetts..................................................     1

                           Witness Testimony

Card, Jill P., president and founder, IBEX Process Technology, 
  Inc., Lowell, Massachusetts....................................     5
Gnatovich, Rock Steven, president, Spotfire, Inc., Somerville, 
  Massachusetts..................................................    11
Von Bargen, Patrick, executive director, National Commission on 
  Entrepreneurship, Washington, DC...............................    22
Gendron, George, editor-in-chief, Inc Magazine, Boston, 
  Massachusetts..................................................    34
Hodgman, John F., president, Massachusetts Technology Development 
  Corporation, Boston, Massachusetts.............................    41

                        Comments for the Record

Amster, Marge, commercial areas coordinator, Economic Development 
  Office, Town of Brookline, Brookline, Massachusetts............    50
Fancher, Terry, CCE., general manager, South Shore Chamber of 
  Commerce, Quincy, Massachusetts................................    51
Khan, Siraj, vice president and chief operating officer, Kinoo, 
  Inc., Cambridge, Massachusetts.................................    53
Kispert, Robert, director of federal programs, Hubbard, Thomas, 
  vice president, Massachusetts Technology Collaborative, 
  Westborough, Massachusetts.....................................    54

          Alphabetical Listing and Appendix Material Submitted

Amster, Marge
  Comments for the Record........................................    50
Card, Jill P.
  Testimony......................................................     5
  Prepared Testimony.............................................     8
Fancher, Terry
  Comments for the Record........................................    51
Gendron, George
  Testimony......................................................    34
  Prepared Testimony.............................................    37
Gnatovich, Rock Steven
  Testimony......................................................    11
  Prepared Testimony.............................................    14
Hodgman, John
  Testimony......................................................    41
  Prepared Testimony.............................................    43
Kerry, The Honorable John F.
  Opening Statement..............................................     1
  Prepared Statement.............................................     3
Khan, Sira G.
  Comments for the Record........................................    53
Kispert G., Robert
  Comments for the Record........................................    54
Von Bargen, Patrick
  Testimony......................................................    22
  Prepared Testimony.............................................    26








                       ENTREPRENEURIAL COMPANIES:
                       THEIR NEEDS AND CHALLENGES
                          IN TODAY'S ECONOMY

                              ----------                              


                       MONDAY, SEPTEMBER 10, 2001

                              United States Senate,
          Committee on Small Business and Entrepreneurship,
                                                   Washington, D.C.
    The Committee met, pursuant to notice, at 9:30 a.m., at the 
MIT Faculty Club, Sixth Floor, 50 Memorial Drive, Cambridge, 
Massachusetts. The Honorable John F. Kerry, (Chairman of the 
Committee) presiding.
    Present: Senator Kerry.

  OPENING STATEMENT OF THE HONORABLE JOHN F. KERRY, CHAIRMAN, 
 COMMITTEE ON SMALL BUSINESS AND ENTREPRENEURSHIP AND A UNITED 
               STATES SENATOR FROM MASSACHUSETTS

    Chairman Kerry. The hearing will come to order. I want to 
thank everybody for joining us here this morning for this field 
hearing of the Small Business and Entrepreneurship Committee. 
This is actually the first field hearing that I have held as 
Chairman, and I am delighted, obviously, to have it here in 
Massachusetts, and to have it here at the Sloan School. I thank 
MIT for receiving us here today, Dean Schmalensee and Chuck 
Vest, and I am very appreciative for the use of these 
facilities.
    For most of the Committee's history, it has been the Small 
Business Committee, and for better or worse, it has focused 
almost exclusively, except tangentially when the new markets 
venture concept came up a couple of years ago, but otherwise, 
almost exclusively on the Small Business Administration (SBA). 
Now, there is nothing wrong with focusing on the SBA and we 
will continue to do that because it is the critical component 
of our relationship with small businesses across the country. 
It is the lending program, 7(a). It is the SBIR, SBIC, 
technology transfer, the 8(a), all of those efforts and other 
continuing programs that we have made to assist small 
businesses. But, there is, in fact, a growing awareness 
reflected in the curriculum of business schools. I know that 
Harvard changed, I think, a year ago, what had been 
traditionally sort of a business structure course into an 
entrepreneurship course, and likewise, there is a national 
study on entrepreneurship which is very interesting that lays 
out some of the particularities with respect to entrepreneurs. 
It is the National Commission on Entrepreneurship that did a 
report in March of this year, ``Understanding How Businesses 
Start and Grow.''
    So, the title for today's hearing reflecting the new focus 
of the Committee, itself, is ``Entrepreneurial Companies: Their 
Needs and Challenges in Today's Economy.'' We have formally 
changed the name of this Committee to include the concept of 
entrepreneurship because we think it merits a special kind of 
focus. An entrepreneurial company is different because of the 
growth needs and because of the types of challenges it faces, 
as a growth company, compared to traditional small business 
that often might be mom and pop or have a different focus in 
terms of growth than a company that we have come to know as an 
entrepreneurial growth entity.
    So, we really want to focus on that today. Though they 
represent less than 5 percent of all businesses, clearly, they 
represent the mass of substantial new jobs and of growth. Most 
companies that become the larger players in our economy, 
whether you are talking about, you know, Fed Ex or Cisco, they 
often begin with some component of Federal input, but they 
transition rapidly into a very different kind of player. 
Needless to say, it is in our interest to maximize our capacity 
to create and assist those kinds of companies.
    Now, one of the legitimate questions today is ``What is the 
appropriate Federal role here?'' Some people might suggest, 
well, we have done very well for 50 years without a sort of 
formalized understanding of this role, and companies have made 
it, some have not. But, that is the nature of the 
entrepreneurial activity and that is the nature of the capital 
system. Indeed, that may well be true; but again, looming over 
us is this question of whether or not there are things that 
legitimately fall within the purview of government. Without 
picking winners, without creating losers, with any kind of 
command control or mandates or anything else, are there ways to 
assist in making the framework more friendly? Are there ways 
that we could deal, legitimately deal with some of the problems 
of new start-up entities? That is really what we want to look 
at today.
    I do not approach this with a predetermined notion of 
outcome. This is a hearing in the truest sense of the word. We 
want to hear from folks, and that will help define for us what 
the potential mission might be of the Small Business and 
Entrepreneurship Committee or where we perhaps ought to be 
careful to keep arms-length and not meddle.
    So, with that quick introduction, let me welcome all of the 
witnesses here today. We are particularly grateful to them for 
coming. Ms. Jill Card, the president and founder of IBEX 
Process Technology from Lowell, and Mr. Rock Gnatovich, 
president of Spotfire, Inc., from Somerville, and then we will 
move to our second panel to sort of talk more broadly about 
some of what we hear in the first panel and some other issues, 
also.
[GRAPHIC] [TIFF OMITTED]79995.001

[GRAPHIC] [TIFF OMITTED]79995.002

    So, Ms. Card, would you lead off, and thank you very much 
for being with us this morning.

STATEMENT OF JILL P. CARD, PRESIDENT AND FOUNDER, IBEX PROCESS 
            TECHNOLOGY, INC., LOWELL, MASSACHUSETTS

    Ms. Card. Right back at you. Thank you. I am Jill Card, 
founder and president of IBEX Process Technology and developer 
of the IBEX line of artificial intelligence controllers for 
semiconductor manufacturing process tools. IBEX was 
incorporated in March 2000, so I feel particularly equipped to 
talk this morning about the trials faced by new companies in 
the high tech market.
    I have spent the last 20-plus years as an applied 
mathematician working within computer systems and semiconductor 
industries. Of those years, 17 were spent in the employ of very 
large engineering companies, and of those, over three-quarters 
of that time was spent within companies undergoing some form of 
transition, reorganization, downsizing, layoffs. I was 
fortunate in never having personally been downsized, but 
energetic people with good ideas get tired of living under 
conditions where job security has little or no correlation to 
their personal ability to perform. I was not alone in 
concluding that I would rather risk my future employment on my 
own ability to react and learn, than to have my fate in the 
hands of someone else's management decisions in a tough 
engineering market.
    So, today, within the computer and semiconductor markets, 
there are a lot of technical people who, either through 
downsizing or personal choice, find themselves on their own 
with great ideas, nerve, energy, leadership, and organizational 
abilities and the excitement that it takes to bring those ideas 
to market. But, these people, like me, may have never imagined 
that they would be in business for themselves.
    As a woman in high tech, I had wrestled and struggled for 
years with how to maintain a career and juggle a family 
simultaneously, but would not have considered being a ship's 
commander had the times not dictated this as a decidedly 
worthwhile option.
    So, in 1998, I set out from Digital Equipment Corporation 
with a technology license for the product that I designed, and 
I started a business. What I found was that despite all my 
technology smarts and ability to think on my feet, the only two 
things I had to use for barter were my mouth and my stock. For 
the lowest possible cost and minimal stock, I needed to figure 
out how to get services for writing business plans, finding 
corporate and IP legal counsel, looking for investment banking 
and venture capital, getting marketing and sales support, web 
page design and collateral development, executive team search, 
et cetera. I had a very strong technical network, I had a great 
product, I had good access to my customer base, and I had no 
clue on how to run the business.
    Time is critical in high tech, and if the development cycle 
for any new product is too long, you are out of business. So, 
when you ask me what could have helped me then, last year, or 
someone like me just beginning, particularly in a difficult 
economy, I would say that any program that would speed my 
ability to pinpoint quality professionals in all the above 
categories, with incentives provided to those professionals to 
encourage their participation in helping me launch my company 
at reduced cost to me and reduced risk to them, to help me get 
off the ground faster, with the right support, and still have 
enough equity after the first year to make a strong and healthy 
company. This would be a tremendous help.
    As it turned out, in the fall of 2000, I approached the 
Boston-based Center for Women in Enterprise, and they 
introduced me to the Springboard 2000 initiative. For those who 
do not know, Springboard is a national series of venture forums 
for women entrepreneurs that helps women close on the funding 
required to grow their businesses. The Springboard 2000 New 
England Forum directly resulted in IBEX landing its first round 
of funding with Battery Ventures as its lead investor. It gave 
me, as a woman entrepreneur, and IBEX, as a company, a chance 
to make it on our own abilities and products through exposure 
to VC's, investment bankers, management consulting firms, legal 
services, both through the actual VC presentation I was 
selected to present and through the preliminary coaching 
sessions with representatives from the various support service 
areas. I started IBEX with my technical network in good order, 
and Springboard dramatically enhanced my efforts to develop the 
business network that I needed. The same concepts that gave 
rise to Springboard for a select few women's organizations 
could greatly assist the arena of high-tech start-ups, 
regardless of gender.
    So, now consider that you have a large number of high-tech 
ventures that may have survived through infancy to a point of 
actual product availability, such as IBEX today. We launch our 
products having met our first year deliverables with stellar 
performance. We have beta tests with top tier semiconductor 
companies that have been excellent in the results. We have been 
sponsored by the International Summit Tech Consortium on those 
beta tests. Our customers are delighted with our products and 
understand that it really is a milestone and a leap ahead of 
what is available today on the market and advanced process 
control.
    Unfortunately, we hit the ground running during an awful 
market downturn. Our customers want our products, but cannot 
buy them right now, with no significant turn-around expected 
for 6 more months, minimum. So, now the company has fixed 
costs; we have staff, we have a roof above our heads; we have 
established support services, field support, et cetera, and to 
survive this slow time, we want to continue to seed the market 
with our products at reduced price, if necessary, and continue 
our new product development, so that when the market turns 
around, we are still in the race, because our larger 
competitors are not going to stop development in advanced 
process control. This means that we need to economize and raise 
a lot less money at a lower market valuation than we originally 
planned. We are not a fat organization, we are as slim as you 
can get right now. So, economizing is really going to be a 
difficulty.
    IBEX, the toddler, has not reached its critical threshold 
of product or customer development to change the market with 
its novel approach and vitality. Small businesses like IBEX 
have the ability and the incentive to adapt quickly and 
innovate in a dynamic new marketplace. I believe these 
companies not only serve to seed 
larger companies with solid new concepts and products, but also 
help offer the field's maverick scientists healthy and 
innervating environments in which to be creative and 
passionate.
    We have extraordinarily high productivity, and perhaps one 
of the things that I have not bulleted up there that is very, 
very important, is that we are building a corporate culture 
that is based on professional and personal integrity and mutual 
respect. There are only 10 of us right now, and hopefully, we 
will be able to maintain that kind of corporate mentality as we 
become 100 or 1,000.
    All these things serve to revitalize the industry and go 
back into bigger parent corporations, and we small businesses, 
trying to compete in the high tech world right now, do need 
some help, whether it be fast access to reduced-rate support 
services or to cash.
    I hope my thoughts are helpful in bringing some light to 
the difficulties that we face as young companies, and I thank 
you for this opportunity.
    [The prepared statement of Ms. Card follows:]
    [GRAPHIC] [TIFF OMITTED]79995.003
    
    [GRAPHIC] [TIFF OMITTED]79995.004
    
    [GRAPHIC] [TIFF OMITTED]79995.005
    
    Chairman Kerry. Thank you, Ms. Card.
    Mr. Gnatovich.

   STATEMENT OF ROCK STEVEN GNATOVICH, PRESIDENT, SPOTFIRE, 
                          INCORPORATED

    Mr. Gnatovich. Thank you, Mr. Chairman, for the opportunity 
to submit this testimony. Let me begin by introducing myself. 
My name is Rock Gnatovich, and I have worked in the software 
industry since 1978. I have been in a founding capacity in 
three start-up companies, all of which remain in business and 
employ nearly 2,000 people.
    I am currently employed by Spotfire, Incorporated. Spotfire 
is an interesting story. The company was originally founded in 
Sweden based on Dr. Christopher Ahlberg's Ph.D. research 
conducted at the University of Chalmers in Sweden and at the 
University of Maryland. As a result of that research, the U.S. 
Patent Office has awarded Spotfire a patent in software 
technology. At the time that I joined Spotfire in early 1998, 
there was one employee other than myself in the United States 
and 15 software developers in Sweden. The company had just 
received its first round of U.S.-based venture capital funding 
from Atlas Venture here in Boston. Since that time, the company 
has established itself as a U.S. company operating subsidiaries 
in Sweden and Japan, and has grown to 179 people, 109 of which 
are in the United States, 5 in Japan, and 65 in Europe. Of the 
109 in the United States, 71 are here in Massachusetts.
    Despite these rather difficult economic times, Spotfire has 
thrived by focusing on the pharmaceutical and energy 
marketplaces where there are large concentrations of highly 
trained researchers, engineers, and other technical 
professionals that are facing very challenging tasks of having 
to make high-value decisions by analyzing and understanding 
mountains of data in very foreshortened timeframes. We call 
these analytic applications.
    The customer adoption of our solution over the past 3 years 
has been very rapid. We now have 400 customers worldwide and 
20,000 users of our products. Included in those customers are 
all of the world's top 25 pharmaceutical companies and 
approximately 150 biotechnology companies. Other prominent 
names include Chevron, Texaco, BP Amoco, AMD, Texas 
Instruments, Proctor and Gamble, Unilever, Mitsubishi Chemical, 
and many others.
    Many times, I will ask our customers how did they do with 
the thousands of decisions that their company had to make that 
day. Did you have a good decision day? Did you have a bad 
decision day? Do you even know? It is our mission as a company 
to empower the users of our product and the companies and 
enterprises that they work in to make great decisions, and we 
have been rewarded with an army of true product enthusiasts.
    Here are just a few examples of how the product is used. 
These examples are featured in the August 13 edition of Fortune 
magazine. At Anadarko, which is the largest independent oil 
services company in the United States, their exploration and 
production professionals use Spotfire to determine where and 
how to drill for oil. A new well is drilled every 5 hours and 
has an average cost of upward of $5 million per well. 
Associated with that decision to drill a new well are multiple 
terabytes of data and information that need to be analyzed.
    At Eli Lilly and at all the other pharmaceuticals, the 
enormous challenges that they face in developing new drugs and 
the huge bets that have to be made on new drug candidates have 
been well documented. Spotfire provides these companies with 
invaluable assistance in selecting a new candidate to move 
forward and discontinuing a failed project early to avoid large 
sunk costs.
    In the semiconductor market, as represented in this case by 
Texas Instruments, the semiconductor market is faced with the 
costs and market challenges of getting a new product to a level 
of manufacturing efficiency quickly in order to release it into 
the commercial market. In this case, Spotfire provides these 
knowledge workers with the means to explore information in a 
way that leverages their expertise to identify both problems 
and opportunities.
    As a company, we are both interesting and unique in that we 
were a global company from the start. This has been both a 
challenge and an opportunity for us. Many large companies 
continuously strive to understand how to serve a global 
marketplace. For us, it was a logistic necessity from the 
beginning. Harvard Business School has written a case study on 
Spotfire that has been taught multiple times at the business 
school and also here at MIT at the Sloan school on this very 
issue of how to manage a global start-up.
    I wanted to also spend a minute on how an experienced 
entrepreneur manages the financial outlook of a venture-backed 
software start-up.
    By the way, I could not agree more on the distinction 
between small business and entrepreneurship, particularly in 
this case.
    Entrepreneurs go to venture capitalists for multiple 
reasons, but obviously high on the list is the immediate cash 
infusion that allows you to accelerate the growth and 
development of a company beyond the level that you can do by 
bootstrapping the business. This cash infusion accelerates your 
paths to the critical mass. It accelerates your ability to 
capture market share, the ability of the company to fully 
develop its offerings without having the benefit of an 
immediate revenue stream and to recruit and retain some of the 
most talented employees.
    Spotfire will not be a profitable self-sustaining company 
until next year, but I want to emphasize that that is according 
to plan. At this stage in our development, we manage our cash 
balances and are putting in place the processes and discipline 
to continue to thrive in the future as a self-sustaining public 
company. We want to be able to take advantage of the time that 
we are private to make the investments in our customers, in our 
products, and in our channels. We could not have achieved what 
we have achieved in the timeframe that we achieved it without 
the assistance of the private equity market.
    My final point is that the United States represents the 
critical consumer or business market for nearly every 
international enterprise. There is significant cost and 
complexity in trying to operate on a global scale when, as a 
company, you are relatively very small. But, it is a necessity 
to be able to address the world market and to do it in a way 
that is both successful and responsible.
    Ethically and morally, we have made attempts, even as a 
small company, to be a positive contributor to the communities 
in which we operate. We hope to be a large part in the 
transformation of Somerville into an exciting venue for 
technology start-ups and have taken a prominent position in the 
business and social structure of Goteborg. The United States 
remains an attractive venue for entrepreneurial endeavors, and 
at the same time, it represents a base to address the world 
stage.
    Thanks again for the opportunity.
    [The prepared statement of Mr. Gnatovich follows:]
    [GRAPHIC] [TIFF OMITTED]79995.006
    
    [GRAPHIC] [TIFF OMITTED]79995.007
    
    [GRAPHIC] [TIFF OMITTED]79995.008
    
    Chairman Kerry. Thank you very much, Mr. Gnatovich.
    Let me come back to the threshold question. Both of you 
have described interesting journeys, not yet complete, 
obviously, but the immediate question that I want to try to 
understand in the framework of the Small Business and 
Entrepreneurship Committee and the Federal Government is the 
role it should play.
    You have talked about, Mr. Gnatovich, the first round of 
financing that you got. What do you say to somebody who might 
suggest, well, OK, that is a very traditional entrepreneurial 
journey. If you have a product that has market acceptance or 
for which there will be ultimately a demand, and you are ahead 
of the demand curve or you are riding the demand curve, your 
product is going to gain acceptability, and you will do what 
companies have done traditionally, ultimately have an IPO and 
go public and your stock will measure your success and 
viability as you go on. Many companies have done that without 
ever looking to the Government for any component of that 
journey. Whereas, more recently, we have obviously seen 
emerging relationships where people say, ``OK, France, Germany, 
China, other countries are more aggressive, sometimes even to 
the point of significant ownership.'' We wind up competing in a 
much freer, more or less a fair marketplace. They are in a more 
assisted/targeted kind of marketplace.
    What do you say to us as we formulate larger concepts or 
principles about how to approach this? Is there a role within 
the 
traditional restraints and guidelines of how we do business in 
this country for us to be more aggressive, more pro-active, or 
are there simply things we can do along the way to remove 
barriers? How would you describe that?
    Mr. Gnatovich. I would say that the way in which you are 
going to get money into the companies is really through two 
avenues. One is going to be investment funded research and the 
other is avoidance of cost. So, in the first case, funded 
research provided by programs such as DARPA can be highly 
valuable and accelerative to, you know, to promoting a product 
and getting it into the marketplace.
    In our case, on the cost side, our customers are global 
companies and they expect us to operate along with them on a 
seamless basis, and issues in terms of the complexities of the 
tax codes and the difficulty in the immigration areas, are 
things that require us to put cost into the companies that do 
not lend themselves to highly productive kinds of activities.
    Chairman Kerry. So, you would see it as secondary or 
ancillary issues, not necessarily primary, in terms of the 
business development, itself.
    For example, I was talking with Dean Schmalensee a moment 
ago and we were talking about what they are teaching here at 
Sloan now. He said that one of the things he tells his students 
is that there is no such thing as an unregulated business. 
Every business has a relationship with the Government, like it 
or not, one way or the other. Some of those relationships are 
environmental regulations, others are export administration 
laws. I mean you can run through the gamut.
    Mr. Gnatovich. Yes.
    Chairman Kerry. The question that I am trying to get at is 
here in Massachusetts, we had--one of our witnesses is a long-
term veteran of the Mass. Technology Development Corporation. 
When I was Lieutenant Governor, I briefly served on that in an 
ex officio capacity. We made business decisions about start-up 
companies that had trouble getting credit, but which we thought 
had a viable concept. They simply were on the lower end of the 
food chain of what was most attractive for a fixed capital 
pool. So, they came to the State, and the State, in fact, 
invested in them, and there are a number of stories of 
companies that went on to become stock exchange members, highly 
successful, creating an enormous number of jobs; at which 
point, as they grew, the State would sell out its portion and 
not take any kind of management role or any sort of stockholder 
role as a group. So, it was really a--it was seed capital, I 
guess is what you would call it.
    Mr. Gnatovich. Yes.
    Chairman Kerry. Is there a larger role for the Government 
in doing that without crossing the line of how we view our 
marketplace?
    Mr. Gnatovich. You know, I may be making a bad assumption 
here, but I think that is commendable, but it is very 
selective. It needs to be a broader kind of initiative, and as 
a broader initiative, again, I would look at creating an 
environment which funded research can be more easily 
accessible, and again, where costs can really be avoided by 
companies that really cannot afford to have that kind of 
infrastructure in place in their early stages of development.
    Chairman Kerry. How would you do that? Particularly with 
respect to employees when you talk about immigration as a 
critical component, what is the role that you foresee?
    Mr. Gnatovich. I have to say that what we have to go 
through in terms of just being able to move people back and 
forth within our own company, it has to do with complexity. It 
has to do with the complexity of the tax codes and the 
complexity and problems associated with immigration.
    I look at, to some extent, maybe the European community is 
somewhat of an example here, that within the European community 
now, things are flowing somewhat better. I am not sure that I 
would hold it as a model yet, but between the boundaries of the 
various countries within Western Europe, there is a lot more 
free-flowing commerce and activity.
    Chairman Kerry. So, what you are saying is if you are a 
multi-national growing corporate entity like yours, where you 
are not yet turning a profit, but you see it in your business 
plan--
    Mr. Gnatovich. Yes.
    Chairman Kerry. But, you have people in one country who may 
be essential to something you do in this country, there should 
be a more seamless movement between them without the long-term 
problems we face in terms of immigration.
    Mr. Gnatovich. I think it goes to your distinction between 
small business and entrepreneurial type ventures. Small 
businesses maybe to some extent tend to be local activities and 
are managed more by local government. Very few of the 
entrepreneurial ventures that I have been involved in have ever 
looked at anything less than the world as their marketplace.
    Chairman Kerry. At what point, properly, do we sort of say, 
``OK, we did our piece and now you are out there on your own?'' 
I mean, it is absolutely appropriate for us, I think, in terms 
of the playing field, to work as hard as possible to eliminate 
all encumbrances. That means, obviously, we have to be diligent 
on market access. It means we have to enforce the trade laws, 
we have to avoid dumping practices. We have to do all those 
things where we are trying to leverage our ability to make the 
playing field as fair and as successful as possible.
    But, in terms of small business, itself, at the moment that 
they are really small businesses, start-up status, et cetera, 
what is the role that we should be playing or the SBA should be 
playing, for instance? I mean, like Ms. Card mentioned, her 
experience in terms of Springboard.
    Now, I want to get you involved in this discussion, Ms. 
Card. You talked about the pinpointing of quality professionals 
and the need for exposure to VC's. Now, to some degree, the 
Women's Business Centers and the entrepreneurial efforts of the 
SBA have moved towards helping people do that. It occurred to 
me immediately that if there is that kind of need, maybe there 
is a nitch, I mean, maybe that is a service that small business 
entities should grow and fill.
    Ms. Card. Right.
    Chairman Kerry. That there is a capacity for people to 
provide that kind of pinpointing. To a certain degree, 
obviously, there are entities that do that already.
    Ms. Card. There are and they are up and coming, and 
unfortunately, what is happening is that you have--
    Chairman Kerry. Do you want to use the mike, maybe, so that 
everybody can hear you?
    Ms. Card. We have very limited resources, and basically, 
everyone is asking for a share of the stock. Now, that is the 
world, but generally, we do not have enough stock to be giving 
it away to all of the incubators at the rates at which it is 
being asked. I mean, that is why, you know, we are talking all 
the time and on the phone all the time with the hope that 
serendipitously, that we are connected to the appropriate 
support services. If you have no time, you have no money, and 
you basically are not paying your people that are working for 
you because they really like the idea.
    Chairman Kerry. Would a purist sit here and say to you, 
``Well, if your product were viable enough, people would be 
tripping over themselves to give you X amount more for whatever 
the portion of stock is'' or they would finance you in other 
ways?
    Ms. Card. I think you are right, and I believe that we are 
not asking for any assistance beyond the very difficult job and 
working hard that we are expected to do. We are running in 
right now at this moment into a situation that is really beyond 
our capacity. We are out of money, we knew we would be out of 
money. We expected that we would go into a second round because 
our product is, proof of concept is there. We have a very good 
relationship with our customers.
    You know, what do you do at this point when you have no 
money and you have great relationships and, you know, 
Springboard has assisted us greatly. We are making alliances 
now among other little companies with high tech innovative 
products. So that, we as a little consortium can offer 
something extraordinary that maybe is a good competitor for a 
larger company. What we would be looking for, some assistance 
there in innovating that approach. It is international. As Rock 
has said, I mean, we are dealing with German companies and 
French companies. We are 10 people, but it is recognized that 
we have a high quality product.
    You know, we are learning as fast as we can, and yes, the--
    Chairman Kerry. So, it is a facilitation as much as 
anything, that you believe is necessary.
    Ms. Card. Right. I think that it is important for there to 
be some thresholding and understanding that this is worth 
investing in.
    You know, my only comment about Springboard, as 
extraordinary an opportunity as it was, only maybe a hundred 
companies nationwide, women entrepreneurial companies, are 
really benefitting by being selected to give that presentation 
before the 400 VC's. Many more are being coached, but 
nonetheless, it is a real culling out of the best.
    Chairman Kerry. How would you then describe the role that 
you think something like the SBA could do? For instance, could 
the SBA, perhaps, have its own pool of qualified start-ups that 
it feels are overlooked and it somehow convenes VC's?
    Ms. Card. I do not have a problem with the idea of the SBA 
doing a thresholding with good cause for investing in this 
particular opportunity. For example, just this immediate one 
which is sort of an economy crisis in the semiconductor market. 
This is a good opportunity to say, ``Yes, this is a very 
worthwhile activity.'' This company may not make it 12 months 
on their stocks. They really need capital right now. Make that 
decision and then go forward with it in just enough--with just 
enough incentive to allow us to survive. That is what I am 
really looking for.
    Chairman Kerry. How did Springboard, very specifically, 
make a difference to you?
    Ms. Card. What was great was that they were bringing 
together investment banking, VC's, legal professionals, 
business consultants, to help coach a group of women to make a 
pitch. For somebody like myself, I said I can do technical 
presentations, that is no problem, but I did not know how to do 
a business presentation.
    Chairman Kerry. Really do a pitch, yes.
    Ms. Card. During the coaching, Battery Ventures said, ``May 
I talk to her now?'' I signed the terms sheet 5 minutes before 
I walked out on stage in the Harvard Business School, and then 
an hour later, we had a bridge loan from Imperial Bank. So, it 
helped me tremendously in connecting me with the right 
professionals here in town. Our key lawyers, in particular. We 
have, you know, a lot of patents. We want good representation.
    Chairman Kerry. So, we can do a better job, in your 
judgment, of helping to marry entities and different skills.
    Ms. Card. Right, and I would say that the effort that was 
spent by the Springboard Committee and CWE here in getting 
those people to come and share their time and their expertise 
and finding the woman was extraordinary, and that is what made 
it work. So, in fact, yes, they were doing a tremendous amount 
of work.
    Chairman Kerry. Interesting.
    Mr. Gnatovich, do you want to add anything to that?
    Mr. Gnatovich. Well, the other area that I wanted to 
mention is the areas where we have sort of the infrastructure 
working together and the role that the Government can play in 
that. Silicon Valley is obviously one that is remarkable, I 
think that the area right here around MIT is remarkable, as 
well as RTP in North Carolina. To the extent that you can 
create an environment that has a whole suite of inter-
connections between academic institutions, government 
institutions, business institutions, that create an environment 
in which small businesses can survive and thrive, is an area in 
which the Government can play a more pro-active role.
    One of our biggest challenges in going from basically 17 
people to 180 people in a little over 3 years, you know, is 
simply the recruiting of talented people in still a very tight 
and difficult job market. The fact that the infrastructure is 
here and the reason why we are here as opposed to anywhere else 
has a lot to do with what surrounds the business. We could look 
outside of our window and basically see many of our customers. 
We certainly have the academic support from the institutions 
here in Massachusetts, but then we look at that on an 
international scale, as well.
    Chairman Kerry. Sure.
    Mr. Gnatovich. You look to find those centers of 
infrastructure so your business will thrive.
    Chairman Kerry. Well, as you all know, last year we passed 
the visa program, H1B visa program, that allowed us to bring in 
195,000 skilled workers from other countries. Now, apart from 
the clear condemnation of our own education system that that 
particular action sets out for all of us, I mean, it is a 
damning statement when you figure that we really do not have a 
worker shortage in America, we have a skill shortage in 
America. The fact that we have to turn to some other countries 
with educated people is a disgrace.
    With that said, it reflects some awareness by the Federal 
Government that we have got to find these folks in order to 
make them available to people. Now, we could probably do a 
better job. It seems to me that one of the things that comes 
out of this is getting the Commerce Department, particularly, 
to focus on sectors of our economy more specifically and do a 
better job of analyzing current needs and perspective needs and 
stay ahead of that curve a little bit, and we probably could 
have better interaction between those conclusions and the 
academic community. I mean, it tends to be pretty ad hoc, and 
we go in these great swings. So, that might be something that 
the Committee might look at a little bit.
    What also leaps out at me, and I want to move to the second 
panel because of the time constraints here, I think you both 
laid out a good picture of two different entities and how you 
have approached it; but the other thing that leaps out at me is 
we probably also could do a better job of really putting 
together a map, if you will, a road map of all the different 
entities, all the different sectors, that have an impact. You 
talked about sort of getting rid of the burdens and lifting the 
side bars, for example, immigration, the tax base, et cetera, 
and again, that tends to be pretty ad hoc. But, if we could 
have a better sense of each step of the way that kind of blocks 
the barricades that you run into, I think it would be helpful 
for us in thinking about how we can facilitate as we go 
forward, and I think we could try to do that with a little more 
specificity.
    Let me thank you both for putting these two examples on the 
table and for doing what you are doing, and I would like to ask 
the second panel if you would come up now, and we can sort of 
pick up on this in a more general form.
    So, if I could have Mr. Patrick Von Bargen who is the 
executive director of the National Commission on 
Entrepreneurship, whose study I have cited; George Gendron, the 
editor-in-chief of Inc Magazine; and Mr. John Hodgman, 
president of the Mass. Technology Development Corporation.
    Folks, thank you very much for being here.
    Patrick, do you want to lead off, and we will just run 
across the table?

 STATEMENT OF PATRICK VON BARGEN, EXECUTIVE DIRECTOR, NATIONAL 
                 COMMISSION ON ENTREPRENEURSHIP

    Mr. Von Bargen. Sure. Thank you, Mr. Chairman.
    Before I begin on my substantive remarks, I would like to 
take the procedural time to note that I have submitted 
testimony for the record.
    Chairman Kerry. Without objection, everybody's full 
testimony will be placed in the record as if read in full. I 
thank you for your summaries.
    Mr. Von Bargen. First, I want to commend you as your first 
act as Chairman of the Committee was to include the word 
entrepreneurship in the new title of the Committee. I think 
that sometimes the significance of that act is sometimes hard 
to understand outside the beltway. But, it is, in fact, a 
significant change. If you think about it for a moment--the 
mental map of policymakers in Washington about the economy and 
how business is structured--I think most policymakers know 
there are the Fortune 500 big companies, there are medium size 
companies that generally populate and fund trade associations 
in every industry you can possibly imagine, and of course, 
there is the very well organized traditional small business 
constituency headed by groups like NFIB and the Chamber of 
Commerce.
    It turns out, though, that by putting entrepreneurship in 
the title of the Committee, you have identified the most 
important component on that economic map, and that is 
entrepreneurial growth companies. They have not been on that 
map because they are not a very organized constituency. They do 
not spend much time--they do not have much time, as they are 
busy building companies--getting involved with politics, 
moreover, their timeframes are such that the company is either 
going to succeed or fail within 3 or 4 years, which means major 
public policy shifts probably cannot help their particular 
company. So that is why they fly a little bit below the radar 
of public policymakers.
    But, notwithstanding the fact that they are not organized, 
they are critically important. At the National Commission, we 
use the fraction two-thirds a lot. If you look at all the data 
out there about what these companies do, they create roughly 
about two-thirds of all the new jobs in the economy. They 
create well over two-thirds of the innovation in the economy. 
Other studies have shown that when you look at differential 
growth rates among countries around the world, two-thirds of 
that difference is accounted for by entrepreneurial activities. 
So this is a very high-leverage part of the economy that is not 
on the Washington map. But you are helping put them on that 
map, and you know better than I what a critical role these 
companies play in the Massachusetts economy.
    One of our most recent reports ``High Growth Companies'' 
pointed out that Boston is actually the No. 1 area among all 
large metropolitan areas in terms of entrepreneurial growth 
companies as a percentage of all business activities. So we are 
here at one of the capitals of the country in that respect.
    Now, I want to talk a little bit about the differences 
between the entrepreneurial growth company ecosystem, if you 
will, and small business, traditional small business, just to 
highlight some of these policy areas that we began to uncover 
with the first panel. First and foremost, let me talk about the 
financial capital needs of these companies. There is a set of 
growth stages that these companies go through, and capital 
plays in each one of them. Start-up capital comes in the form 
of personal savings, it comes from investment from friends and 
family, it comes from signing up for every credit card you can 
get your hands on, it comes from second mortgages you put on 
your home, and that gets the company maybe up to $200 to 
$300,000. Then you move into an early-stage phase, and that 
early stage phase has to be filled typically now with 
individual investors, sometimes called ``angel'' investors, or 
sometimes seed capital funds very much like the Massachusetts 
Technology Development Corporation would provide. Then the next 
stage would be going to institutional venture capital, and then 
finally to exit strategies for that institutional capital in 
the form of IPO's and acquisitions.
    But the key point here is that almost at every stage, these 
companies are seeking equity and not debt, which is the 
difference with small business. Where small businesses 
celebrate the success of guaranteed loan programs which are 
admittedly critical, entrepreneurs more celebrate the success 
of SBICs. They celebrate the fact that the reason we have a 
huge venture capital industry in the United States is that in 
1978, the Congress changed a ERISA to allow public pension 
funds to invest a small portion of their assets in venture 
capital. They celebrate the creation of NASDAQ. Without NASDAQ, 
we would not have the IPO market for entrepreneurial growth 
companies. The challenge today in capital is this early-stage 
area. There is a lot of venture capital out there. True, right 
now, it is very slow on the pickup, but the urgent need is this 
early-stage capital gap between $300,000 and $3 million, 
roughly.
    Let us talk a little bit about human capital needs. What 
entrepreneurial companies need are incentives for managers, 
technical staff, and even entry level employees to join their 
companies as opposed to more established companies. The focus 
is on attracting skilled employees, not controlling labor 
costs. Whereas traditional small business might lament every 
increase in the minimum wage, entrepreneurs talk instead about 
tax-favored stock options and stock-ownership programs. They 
talk about the national defense education programs of the 
1960's and 1970's that created math and science graduates 
throughout the country, and they talk about the H1B visa 
program, for example.
    The challenge today in the human capital area from an 
entrepreneurial company standpoint is reform of the K-to-12 
education system, re-instituting incentives to produce more 
graduates in science and technology, and in a very specific 
case, undoing some of the damage done by the alternative 
minimum tax to incentive stock options.
    Let us talk about other business assets, like equipment. 
For small businesses, tax-expensing of new equipment purchases 
is critical, but for entrepreneurial growth companies, the key 
business asset, other than money and human capital, is the 
creation and protection of new intellectual property--
intangible assets as opposed to tangible assets. Entrepreneurs 
celebrate public investment in R&D, balanced patent and 
copyright laws, and successful SBIR and STTR programs.
    The fourth area is creating new markets, and expanding 
existing markets. Those are absolutely critical to 
entrepreneurs because they create entirely new business 
opportunities. Whereas traditional businesses may fight for 
better Federal procurement set-sides, entrepreneurs instead 
celebrate the deregulation of the telecommunications market, 
information-technology market, transportation industry, and 
also insist on the expansion of U.S. exports around the world. 
The challenge today for entrepreneurial companies is how will 
entrepreneurial companies do in the shake-out in continuing 
changes to telecommunications regulations and legislation, and 
will there be trade assistance for smaller entrepreneurial 
growth companies so that they can truly realize their potential 
in global markets.
    The final area is infrastructure needs. Entrepreneurial 
growth companies depend on physical, legal, and social 
infrastructure that creates an environment in which they can 
thrive. Small businesses and entrepreneurial companies alike 
lament complex Federal regulation, but entrepreneurial 
companies also are concerned about continuing Federal 
investments in the transportation system that connects them 
with the global economy. Same with the communication system. 
Also entrepreneurs urge the Government to do everything it can 
do to support some of these local entrepreneurial networks that 
we talked about a little bit in the first panel--those local 
and regional networks that connect entrepreneurs with other 
entrepreneurs, with investors, with suppliers, with potential 
employees and with customers. Those are just absolutely 
critical to successful entrepreneurial regions. Next month, we 
at NCOE are going to be publishing a report on the importance 
of networks and how networks can be started and maintained.
    Interestingly, entrepreneurs also are generally favorable 
towards sound environmental legislation because it creates the 
clean air, clean water, and recreational opportunities that 
they like to find in regions where they tend to congregate and 
grow. Finally, laws that increase tolerance in diversity in 
communities are quite important because entrepreneurial 
companies want to draw upon all skilled people, no matter what 
ethnic background they have, what nationality background they 
have, their lifestyles or whatever, and they seek out 
communities in which tolerance and diversity are strong.
    So, in conclusion, by renaming the Committee, I think you 
have done a great service to the Nation. Nothing I have said 
here, I think, diminishes the importance of traditional small 
businesses concerns. They are very important to the economy, 
and you know that, and your record evidences that quite 
adequately. But, by adding entrepreneurship, you really added 
to the role of the Committee. I think the potential role of the 
Committee here could be as a steward of the entrepreneurial 
ecosystem in the country; that stwardship means examining every 
Federal policy action, with one question in mind, ``Does it 
help to maintain or enhance or expand entrepreneurship in the 
United States?'' If the Committee looked at its mission as 
playing that stewardship role, I think the value to the Nation 
would be enormous.
    [The prepared statement of Mr. Von Bargen follows:]
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    Chairman Kerry. Thank you, Mr. Von Bargen. I appreciate 
your comments very much, and I also thank you for your personal 
stewardship of the commission, which I think has made a 
significant contribution. Thank you.
    Mr. Gendron.

         STATEMENT OF GEORGE GENDRON, EDITOR-IN-CHIEF, 
                          INC MAGAZINE

    Mr. Gendron. Good morning, Mr. Chairman. Thank you for the 
opportunity to appear in front of this Committee. For the past 
few years, I have been editor-in-chief of Inc magazine, the 
preeminent publication for founders and top managers of 
America's premiere growth companies. Last summer, as we 
discussed earlier, I made the decision to sell the magazine, 
and as of last August, it had become part of the $17 billion 
German media empire. But, despite that ownership change, the 
magazine continues its mission of helping people create 
professional and economic independence for themselves by 
starting and growing their own enterprises.
    I will do one thing that is most difficult for an editor 
this morning, I will be very brief. I just want to make really 
three points to you. The first is at the risk of sounding as if 
I am disagreeing with some of the earlier panelists, I start 
with the observation that the greatest misconception about 
entrepreneurship today in the culture at large is the belief 
that it is synonymous with technology. It is not. As important 
as the technology may be to our national interest, it is only 
one part of a vast mainstream entrepreneurial economy.
    A corollary of this misconception is the belief that all or 
most of our significant new businesses are venture backed. They 
are not. For 20 years now, we have published Inc 500, an annual 
ranking of America's fastest growing private companies. This 
year's list, the 2001, is about to be released in a few weeks. 
Of this year's Inc 500, half of them were started with $20,000 
or less, 88 percent were initially funded with the founder's 
personal assets, or what Patrick earlier referred to as friends 
and family money. Only 3 percent of this year's Inc 500 were 
venture backed at launch. We call this bootstrapping, and it is 
this process that transforms human capital into financial 
capital. It transforms hard work, ingenuity, innovation, and 
risk taking in every part of the economy into the true wealth 
of the community. I point this out because it is crucial for 
this Committee to understand that the challenges and 
opportunities of building a self-financed growth company bear 
almost no resemblance to the challenges of growing a venture 
backed firm.
    Just to cite one crucial difference, in the interest of 
time, the overwhelming majority of young virgin companies in 
this country are completed unaffected by events and 
developments in institutional venture capital or the IPO 
markets. On the other hand, they depend utterly on access to 
credit, both long and short term. I would urge this Committee 
to include these objectives in examination of current 
conditions in credit markets where even the most credit worthy 
entrepreneurial borrowers are experiencing chronic 
difficulties.
    The second thing I would like to discuss briefly this 
morning is the single most important development in the 
mainstream economy in the past two decades, and Patrick 
referred to it just moments ago. It is the growth of what we at 
Inc refer to as the entrepreneurial social networks that have 
been developing in this country. During the past 20 years, we 
have created in the United States unprecedented levels of 
knowledge about every facet, large and small, of how to grow a 
business. The conventional wisdom is that this knowledge 
resides primarily in the form of books, magazines, case studies 
in universities, courses in entrepreneurship on our Nation's 
campuses. This simply is not the case. The real know-how is 
imbedded in the community, itself, in the knowledge possessed 
by service providers, lawyers and accountants, bankers and 
investment bankers, and principally experienced entrepreneurs 
who have done it all before, often more than once.
    For first time entrepreneurs--in fact, I think Judy 
addressed this earlier this morning--increasingly, the 
challenge at start-up is less a question of whether you 
personally have the necessary skills and knowledge to launch a 
new venture, but rather whether you can identify the people who 
had that knowledge and experience and how to enlist them in 
your cause. This meeting is taking place at the epicenter of 
one such entrepreneurial network, MIT, in a city that is 
blessed with one of the most fully developed networks anywhere 
on the face of the earth.
    One thing that is not well understood about the networks is 
that they are self-replicating. Experienced founders, mentors, 
young entrepreneurs, in formal and informal relationships, they 
invest as angel investors in the next generation of start-ups. 
Entrepreneurial cultures develop an entrepreneurial mindset 
among their employees leading to spinoffs. Increasingly, 
entrepreneurial companies developing managing practices and 
training programs desire to build upon their employees not only 
an entrepreneurial spirit, but the actual skills and talents to 
go off and start their own ventures and approach the culture 
building we at Inc refer to as open book management.
    What this means for communities that have developed a 
certain critical mass of entrepreneurial activity is that 
entrepreneurship breeds entrepreneurship. Entrepreneurial 
success leads the next generation of entrepreneurial success.
    My final point is to talk just very briefly about the rise 
of a new generation of what recently has come to be called 
social entrepreneurs. It strikes me that the best and brightest 
of every generation gravitate to that part of a culture where 
they feel they can have the most impact, government in the 
1960's, journalism in the 1970's, entrepreneurship and Wall 
Street in the 1980's. But, recently, the best and brightest 
have taken a new direction all together and have become what is 
known as social entrepreneurs, creating new, young, nonprofit 
organizations designed not to maximize profit, but to create 
new innovative solutions to chronic social and cultural 
problems.
    Ten years ago here in Boston, two young graduates of the 
Harvard Law School, Michael Brown, and Alan Khazei, decided to 
forgo lucrative careers on Wall Street and instead launched an 
organization many of us in town know well called City Year, a 
domestic urban peace corps which transforms thousands of young 
men and women into community leaders with the equivalent of an 
MBA, and creating and leading community service projects 
throughout the country.
    In recent years, the number of young entrepreneurial 
nonprofits operating in the United States has grown 
dramatically, as has employment in the nonprofit sector. Yet, 
for all of their innovation and for all of their passion, this 
sector is plagued with an absence of resources and 
infrastructure that we in the for-profit sector take for 
granted. The result is that many new ideas and innovations 
languish at the local level. Consider this: Every year, we see 
thousands of young promising companies go to scale; in other 
words, take an idea that has worked locally and bring it to the 
national or international level. In recent memory, in our 
lifetime, only one nonprofit has gone to scale, Habitat for 
Humanity, and most observers agree that it would never have 
been possible without the support of our former president, 
President Carter.
    It is time we as a nation understood that entrepreneurship 
today is about more than the creation of financial wealth. It 
is about getting important new things done. It is time we 
focused on the need to create an infrastructure that will 
support and sustain the entrepreneurial efforts of our 
counterparts in the nonprofit sector, as well.
    Thank you very much.
    [The prepared statement of Mr. Gendron follows:]
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    Chairman Kerry. Thank you very much, Mr. Gendron.
    Mr. Hodgman.

    STATEMENT OF JOHN F. HODGMAN, PRESIDENT, MASSACHUSETTS 
               TECHNOLOGY DEVELOPMENT CORPORATION

    Mr. Hodgman. Senator Kerry, I would like to thank you and 
your Committee for holding this hearing in the Boston area 
regarding the needs of entrepreneurial companies. My testimony 
will address the issue of risk capital needed by these 
companies.
    My name is John Hodgman. I have been the president of the 
Massachusetts Technology Development Corporation since 1984. 
MTDC is a state-chartered venture capital firm which focuses on 
very early-stage technology companies located in Massachusetts. 
Since its inception in 1978, the corporation has invested about 
$47 million in 111 companies, leveraging $14 of private capital 
for every MTDC dollar, and the internal rate of return over 
these 23 years is about 18.2 percent.
    MTDC concentrates on companies that fall into a chronic gap 
in the venture capital marketplace. These firms usually have 
the following characteristics: They are raising relatively 
small amounts of capital, they are founded by technologists who 
are first-time entrepreneurs, and they are initially pursuing 
small market segments.
    There are two factors that cause this gap. The first is how 
long it will take for companies to reach an exit that will give 
investors a return. If the harvest period exceeds 5 to 7 years, 
the rate of return may not be attractive enough for typical 
venture capital firms. The second is the amount of money the 
company is raising. As funds that venture capital firms manage 
have grown to hundreds of millions of dollars, these firms have 
set high thresholds for minimum investments. Start-up companies 
seeking less than these threshold amounts fall into the capital 
gap.
    Let me illustrate. Since 1995, the capital gap has widened. 
One way to measure this is to look at the size of the average 
venture capital investment per deal. Between 1986 and 1994, the 
average deal size each year consistently ranged from $1.8 to 
$2.9 million. Then between 1995 and 1997, the average deal size 
grew from $3.9 million to $4.3 million. Finally, in 1998, 1999, 
and 2000, the average deal size ballooned to $7.3, $11.1, and 
$16.7 million, respectively.
    At MTDC, we generally consider the upper end of the capital 
gap to range between 30 to 50 percent of the average deal size. 
From 1986 to 1994, companies raising less than $1 million fell 
into the capital gap. However, during the last 3 years, we 
found the upper end of the gap had risen to $4 million.
    The more venture capital dollars that become available, the 
more difficult it has been for early-stage companies to raise 
smaller amounts of money. Between 1995 and 1999, this problem 
was addressed to a large degree by individual investors. 
However, since the stock market meltdown, individual investors 
have abandoned early-stage investing.
    In the next few years, it appears that the venture capital 
industry is evolving as follows: There will be stable firms 
managing $300 million to $1 billion each. There will also be a 
large number of newer firms managing $50 to $300 million, of 
which a significant number appear to be unstable. There will 
also be a relatively small number of experienced firms managing 
$25 to $50 million and a much larger number of newer firms 
managing $5 to $25 million.
    This environment presents several challenges for all of the 

smaller venture firms that focus on early-stage investment. I 
would like to use MTDC's experience and perspective regarding 
one of these challenges which is efficient fund raising by the 
venture capital firms, themselves.
    Our mission is to help companies get started and grow. We 
have a policy of co-investing with private investors. 
Therefore, we are very concerned about the health of the early-
stage venture capital industry. The major challenge all the 
early-stage funds face is how to raise appropriate size venture 
capital pools in the most cost effective way. These funds or 
pools range from $20 to $50 million and they need to be secured 
every 3 to 4 years. Historically, senior venture capital 
partners in smaller firms have to effectively shut down 
investing every few years and spend up to 2 years raising $1 to 
$5 million from smaller institutional investors and individuals 
to put these funds together.
    As a matter of public policy, it would benefit all 
stakeholders if there were mechanisms to encourage the 
consistent placement of smaller size investment funds within 
the nationwide network of venture capital firms that focus on 
start-up and early stage companies. This would help the 
professionals to focus on company building, not fund raising. 
It would also help to supply a steady stream of growing 
companies that might at some point attract the interest of 
larger venture capital firms. These new companies would 
continue to provide new job opportunities for both new entrants 
to the labor force and experienced people who are dislocated by 
virtue of the downsizing of larger companies.
    Whether the mechanisms are created using tax policy, risk 
mitigation strategies, or ``jaw boning'' by public officials, 
is really in the domain of you and your colleagues. However, I 
believe that addressing this chronic capital gap is a priority 
you should carefully evaluate.
    Thank you for listening to my testimony, and I would be 
happy to answer any questions.
    [The prepared statement of Mr. Hodgman follows:]
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    Chairman Kerry. Thank you, Mr. Hodgman. Thank you. I want 
to take a moment just to say thank you for your tremendous 
contribution to the Commonwealth and to the economy through 
your years of service. I think it has been a great success 
story and I was pleased to be there at the beginning of it.
    Mr. Hodgman. Indeed. As I said earlier, this is a bookend 
because I retire in 2 weeks. I am actually going to be teaching 
entrepreneurship, both for profit entrepreneurs and social 
entrepreneurs at Tufts University.
    Chairman Kerry. Terrific. They will be lucky to have you 
doing that.
    Mr. Hodgman. Thank you.
    Chairman Kerry. Come back to those, the whethers, whether 
it is this or that that we might engage in. What are you 
suggesting that we do specifically to address that gap in 
capital?
    Mr. Hodgman. Let us look at the goal. The goal is to get 
smaller size funds raised consistently. To some degree, the 
SBIC program has offered this opportunity, and interestingly 
enough, there are incentives that will cause, for example, 
banks, to invest in SBIC's because they receive CRA credit, 
where they might not like to or that might not be a priority 
for them. So, I think if you took the SBIC mechanism and 
started to look more closely at what size funds you would like 
to see generated around the country, what the network ought to 
be, how predictable the fund managers might look at this source 
of capital. I think some engineering here might help.
    Chairman Kerry. What kind of incentives, other than the 
CRA, SBIC might you envision?
    Mr. Hodgman. There may be some tax incentives that could be 
offered to investors who put money into these particular funds, 
so that they can tolerate the lower rate of return that is 
driven by the time of the investment, or some risk pool 
strategies. The SBIC does this to some degree with their 
approach.
    Chairman Kerry. Is it a function, is the gap a function of 
just the time and slow return and cycle, and therefore, it is 
more attractive to people to manage a larger amount and get in 
in second stage or third stage?
    Mr. Hodgman. It is a lot easier to raise larger funds. 
Plus, your management fees are much higher if you raise larger 
funds.
    Chairman Kerry. But, are not the larger funds also paying 
out those funds at a rate that is determined by the 
availability of deals that they find attractive?
    Mr. Hodgman. It is, and frankly, in the last 3 years, we 
had much too much money going into venture capital pools. $151 
billion nationwide over the past 3 years, $15 billion in 
Massachusetts, alone. Those numbers, incidentally, in 3 years, 
were almost three times more than what went out over the 
previous 12 years nationwide and in Massachusetts.
    What is wonderful about capital markets is that they self-
correct. We are self-correcting with a vengeance right now, but 
the whole system has been distorted at this point.
    Chairman Kerry. What is the role of the Government in terms 
of that? I mean, is not that the marketplace that is subject to 
those distortions?
    Mr. Hodgman. Absolutely, and I would not suggest that the 
market should be altered, except to take some lessons learned 
from that experience and look at what is needed to make the 
availability of funds at the seed and early-stage level, 
consistent, not fluctuating up and down. Just keep it 
consistent, no matter what goes on with the larger fund 
raising.
    Chairman Kerry. Given the success of the MTDC, should there 
be some kind of small business program, that was to some 
degree, the new markets venture initiative that we started, I 
guess, a few years ago, or have been pushing for. Is that an 
appropriate role?
    Mr. Hodgman. I do not know enough about the new markets 
initiative to be able to use that as a model. MTDC actually got 
its initial funding through the U.S. Department of Commerce 
Economic Development Administration setting up a revolving loan 
fund. That was about $3 million, and then the State provided 
another $5 million, and we have grown that to over $30 million 
in assets.
    So, there are some programs that could be used to try to 
seed some of these funds, but I think that the bigger challenge 
is once you have got these funds up and running and they have 
been successful and they have a track record, raising that next 
$20 to $50 million that you need every couple of years becomes 
the real challenge.
    Chairman Kerry. Mr. Gendron and Mr. Von Bargen, what do you 
think in terms of the Federal role here, particularly the SBA's 
small business focus?
    Mr. Von Bargen. I think the idea just discussed is a very 
good one. In fact, to some extent, that was the conceptual 
notion with the new market venture funds. That bill, of course, 
was targeting even tougher areas in which to get 
entrepreneurship going, but using the risk mitigation 
capabilities of SBIC's and community development fund structure 
to pull that off. I generally endorse those ideas, and if that 
could be paired with tax incentives to move more capital into 
this seed gap area through the kind of mechanisms that we just 
discussed, I think that that might make a lot of sense.
    Chairman Kerry. Do you draw a line, any of you, that it is 
perhaps appropriate for us to create a framework which may draw 
the capital, but we should not be making decisions with respect 
to the capital? Now, that is different from MTDC. You made 
decisions.
    Mr. Hodgman. Yes, but I think setting the framework makes a 
lot more sense because, you know, MTDC represents a very small 
amount of money. What we are trying to do is leverage private 
investors. So, if you can create a framework that could get 
private investors more interested in this segment, it is going 
to help across the board.
    Chairman Kerry. What do you think, Mr. Gendron? You have 
written about this for a long time and observed it.
    Mr. Gendron. I was thinking about the program created by 
Governor Blanchard in Michigan in the late 1980's in which, not 
unlike the MTDC, but with a very specific goal of building in 
the State of Michigan a long term private sector venture 
capital presence that simply never existed before, particularly 
to fund young technology conduits that were servicing the 
automotive sector. That was a really intelligent, highly 
leveraged use of public funds, and it went beyond trying to 
pick winners in this particular case and achieved a relatively 
extraordinary degree of success in adding a component to the 
infrastructure that simply did not exist before his tenure.
    Chairman Kerry. Well, we should take a look at that. We 
will go back and sort of pull it out and see how it might be 
applied here.
    Are there any other steps we should take with respect to 
the bootstrapping versus equity?
    Mr. Hodgman. Well, one point I want to make is that MTDC is 
a venture capital firm in terms of its operation, but we do 
something that most other venture capital firms do not do, and 
that is meet with entrepreneurs at very, very early stages, 
when they have a draft business plan. We will critique the 
plan, will arrange for them to make presentations in the 
technology capital network. We do a lot of the behind the 
scenes support, introducing them to consultants and advisers. I 
think this was stated earlier and it is extremely important in 
company building for people who have never started businesses 
before. They need this network of coaching and assistance and 
capital at critical stages.
    Chairman Kerry. Do you think--yes, you wanted to comment?
    Mr. Von Bargen. On the bootstrapping question, I think 
there are a number of companies that have actually begun to 
sell product and actually make some profit, but have the 
potential to grow substantially, and they may not fit the 
venture capital investment profile because their candidates for 
initial public offering is not the case or acquisition path is 
not obvious to see, but they would like to continue to grow in 
funds. There are proposals in draft legislation right now that 
would allow companies at that stage, that are profitable, to 
defer Federal income tax paid for some period of time up to 
some amount, so that they could use their earnings to re-
invest and the company to grow. That is a proposal we might 
take a look at.
    Chairman Kerry. Well, I think that is valuable. I think 
what comes out of this this morning is the notion that there 
are obviously different missions, different roles, at different 
stages here which we could look at without violating, I think, 
sort of the arm's length notion again about not picking winners 
and losers, but just adjusting the framework, tweaking the 
framework in ways, for instance, there is certainly a response 
to what Ms. Card said about that early networking and 
availability, clearly SBA's role, it seems to me. Under its 
umbrella, technical assistance that already exists is to 
broaden the technical assistance component to be doing a much 
better, job maybe to even have a division targeted towards 
start-up entrepreneurial efforts versus the traditional mom and 
pop smaller entity that may not have growth aspirations. Those 
really are two different kinds of companies, they are two 
different kinds of approaches and two very different kinds of 
prospects.
    Then, of course, there is the credit/bootstrapping issue. I 
mean, how effective is CRA? How well are people implementing 
it? How much are some of these banks that have consolidated 
maintaining small business portfolios and access in their 
lending? There has been the same instinct in banks, we notice, 
to start dealing with the larger portfolios because it is 
easier. Same amount of time for the loan officer, same amount 
of paperwork, better return on investment, so people turn off 
helping the small business person.
    I think we can do a lot to help energize people's focus on 
the start-up case. I have talked to a lot of friends in the 
community, and the numbers of deals crossing their tables, you 
know, for their decisionmaking versus the numbers they actually 
get engaged in are just staggering when you think about it. I 
mean, literally.
    Mr. Hodgman. Usually, it is about 3 to 5 percent of the 
total.
    Chairman Kerry. So, obviously, there are a lot of ideas out 
there, but again, that is the nature of the marketplace, too. I 
mean, people are going to grab good ideas.
    I have to, unfortunately, truncate this discussion, and I 
apologize for that, but schedule demands that I have to be 
somewhere else in the city. We are going to leave the record 
open for 10 days, and any of you here in the audience who feel 
that you have a comment that is relevant or an observation that 
could add to this discussion, there is a form outside at the 
desk when you leave, and that will instruct you as to how you 
can, in fact, contribute to the public record with respect to 
this. So, if you pick that up on the way out and submit that 
within the 10-day period, we can review and include your 
comments in the record of this hearing.
    It is an interesting issue. In the last 10 or 15 years, Mr. 
Gendron sort of talked about the cycles, have put an enormous 
focus on
entrepreneurship, and I think the public imagination has been 
excited by it. I mean, it is sort of a new era, as the 
Commission report points out, it is a new era of respect for, 
and even, sort of admiration and envy for the most successful 
of the entrepreneurial efforts of the last decade or so, not 
just for the wealth created, but for the impact on people's 
lives and concepts. One could argue that there is really a new 
age of acceptance of that kind of entrepreneurial activity. 
There are many ways that I think we could harness its energy 
more effectively, and that is the purpose of this effort, to 
figure out how we can perhaps leave it less to lady luck or to 
just the few who are successful to expand the market, to expand 
the job base and the tax base, and ultimately, the upside of 
the technological productivity increases that come with it for 
all of us. So, it is a worthy quest, I think, and we are going 
to continue to travel down this road and see how it comes 
together.
    So, I thank all of you for your testimony this morning. It 
has been helpful and instructive, and it has begun to set some 
guidelines for how we might proceed as we go down that road. I 
really would welcome very specific notions from anybody about 
how the Committee might either begin something new within the 
framework of the SBA or other entities, the Commerce 
Department, Export Administration, other places which touch on 
these efforts, or how we might augment current efforts that are 
already underway.
    The SBA, I might add, has moved on its own to sort of begin 
to cope with a lot of these issues, and I think it is doing a 
much better job than it did previously in helping to provide 
some of the networking that Ms. Card talked about.
    So, we will leave the record open for 10 days. I thank 
everybody for being here today, and the hearing is adjourned.
    [Whereupon, at 10:55 a.m., the Committee was adjourned.]
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