VENTURE CAPITAL IN ORANGE COUNTY : The Recipients : The Hard-Pressed Entrepreneur Finds That Part of a Loaf Is Better Than None
Theodore J. Smith courted venture capital to help him launch his high-tech firm, FileNet, knowing his ownership of the Costa Mesa company would drop to a 4% stake.
William De Temple detests the prospect of losing control of REST Inc., but he is close to securing funds from an Orange County venture firm that his Rancho Cucamonga company needs to start production of its new technology and ready to give up part of his company.
Michael Henos and his partners at an Irvine biomedical instruments company, ProMed, spurned an offer of venture capital and ended up selling the company to a firm that soon closed its doors.
All three needed the money to get their firms growing, and venture capital was their lifeblood, the only game in town.
“Because there’s an opportunity doesn’t mean it’s the right thing to do,” said Henos, who has changed hats to become a principal in the Newport Beach office of 3i Ventures, a London-based venture capital firm.
ProMed, a sole proprietorship when Henos arrived in 1982 and reorganized it, had tried to find $1 million for expansion, but Henos and his partners didn’t want to give up too much of the company. So they turned down one verbal offer of a $400,000 package because the venture capital firm wasn’t giving them enough money and wanted too much equity--35%--in return.
“Raising $1 million for a young company that is not fully balanced is harder than raising $5 million for a slightly older, more mature operation,” he said.
In retrospect, Henos said, he and his partners never should have passed up a full venture capital package, including management to go along with the money.
De Temple is going through the agony now of getting venture capital and losing a chunk of the company he has nurtured with his sweat and tears for the past 16 months.
“They always want control,” De Temple said about venture managers. “Most demand control.”
REST--for Remote Electronic Shelf Tag--has developed the technology to replace the paper tags on grocery store shelves with tiny computer chips so that prices can be changed daily from a company’s headquarters.
After sending business plans to about two dozen venture capital firms from San Francisco to Dallas to New York, De Temple thinks he finally might get funding through an Orange County venture firm, which he declined to identify.
“I want something where it would be worth my while to stick with it,” he said. “I have $1.5 million invested into this, and I’m not just going to give it away for a small profit. There’s too much to be gained.”
Ted Smith, a veteran businessman and entrepreneur who left MAI Basic Four in Tustin in an acrimonious split in 1981, knew just what he wanted to accomplish when he founded FileNet in 1982. Most of the projections in the five-year business plan penned in 1982 have been met, including $52.1 million in revenue last year. He credits his firm’s fast growth to good business research and engineering and four rounds of venture capital totaling $40 million. FileNet makes electronic, optical disk devices that copy and store office paper work--a computerized filing cabinet for the “paperless” office.
In starting the company, he calculated how much he could lose or gain with venture capital.
“I really had to privately project what I thought the company’s size would be and, therefore, what its value would be and what my equity would be worth,” he said. “I could see that that was still a very attractive number.”
He said the total effort has been “highly successful for everyone.” FileNet went public in a $25-million offering in July, and the original investors “got eight times their money back,” he said.
