U.S. GOVERNMENT PRINTING OFFICE

WASHINGTON : 

For sale by the Superintendent of Documents, U.S. Government Printing Office

Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800

Fax: (202) 512–2250 Mail: Stop SSOP, Washington, DC 20402–0001

47–799 PDF 2009

FULL COMMITTEE HEARING ON: 

EXPANDING EQUITY INVESTMENT 

IN SMALL BUSINESS 

HEARING 

BEFORE THE

COMMITTEE ON SMALL BUSINESS 

UNITED STATES 

HOUSE OF REPRESENTATIVES 

ONE HUNDRED ELEVENTH CONGRESS 

FIRST SESSION 

HEARING HELD 

MARCH 26, 2009 

Small Business Committee Document Number 111-013 

Available via the GPO Website: http://www.access.gpo.gov/congress/house 


Congress.#13
HOUSE COMMITTEE ON SMALL BUSINESS 

NYDIA M. VELA ́ ZQUEZ, New York, Chairwoman 

DENNIS MOORE, Kansas 

HEATH SHULER, North Carolina 

KATHY DAHLKEMPER, Pennsylvania 

KURT SCHRADER, Oregon 

ANN KIRKPATRICK, Arizona 

GLENN NYE, Virginia 

MICHAEL MICHAUD, Maine 

MELISSA BEAN, Illinois 

DAN LIPINSKI, Illinois 

JASON ALTMIRE, Pennsylvania 

YVETTE CLARKE, New York 

BRAD ELLSWORTH, Indiana 

JOE SESTAK, Pennsylvania 

BOBBY BRIGHT, Alabama 

PARKER GRIFFITH, Alabama 

DEBORAH HALVORSON, Illinois 

SAM GRAVES, Missouri, Ranking Member 

ROSCOE G. BARTLETT, Maryland 

W. TODD AKIN, Missouri 

STEVE KING, Iowa 

LYNN A. WESTMORELAND, Georgia 

LOUIE GOHMERT, Texas 

MARY FALLIN, Oklahoma 

VERN BUCHANAN, Florida 

BLAINE LUETKEMEYER, Missouri 

AARON SCHOCK, Illinois 

GLENN THOMPSON, Pennsylvania 

MIKE COFFMAN, Colorado 

MICHAEL DAY, Majority Staff Director 

ADAM MINEHARDT, Deputy Staff Director 

TIM SLATTERY, Chief Counsel 

KAREN HAAS, Minority Staff Director 

(II) 

Subcommittee on Investigations and Oversight 

JASON ALTMIRE, Pennsylvania, Chairman 

HEATH SHULER, North Carolina 

BRAD ELLSWORTH, Indiana 

PARKER GRIFFITH, Alabama 

MARY FALLIN, Oklahoma, Ranking 

LOUIE GOHMERT, Texas 

(III) 

C O N T E N T S 

OPENING STATEMENTS 

Page 

Altmire, Hon. Jason ................................................................................................. 1 

Fallin, Hon. Mary .................................................................................................... 2 

WITNESSES 

Hendrickson, Ms. Pamela, COO, The Riverside Company, New York, NY ........ 5 

Neff, Mr. P. Sherrill, Founding Partner, Quaker BioVentures, on behalf of 

the National Venture Capital Association ......................................................... 7 

Walker, Mr. Tom, Presidents & CEO, 12e, Oklahoma City, OK, on behalf 

of the Biotechnology Industry Association ......................................................... 9 

Mott, Ms. Catherine, Founder & CEO, Blue Tree Capital Group, LLC, Wexford, PA ................................................................................................................. 11 

May, Mr. John, Founder & Managing Partner, New Vantage Group, on behalf 

of the Angel Capital Association ......................................................................... 13 

Dalton, Mr. Patrick, President & COO, Apollo Investment Corporation ............ 15 

APPENDIX 

Prepared Statements: 

Hendrickson, Ms. Pamela, COO, The Riverside Company, New York, NY ........ 24 

Neff, Mr. P. Sherrill, Founding Partner, Quaker BioVentures, on behalf of 

the National Venture Capital Association ......................................................... 36 

Walker, Mr. Tom, Presidents & CEO, 12e, Oklahoma City, OK, on behalf 

of the Biotechnology Industry Association ......................................................... 48 

Mott, Ms. Catherine, Founder & CEO, Blue Tree Capital Group, LLC, Wexford, PA ................................................................................................................. 54 

May, Mr. John, Founder & Managing Partner, New Vantage Group, on behalf 

of the Angel Capital Association ......................................................................... 59 

Dalton, Mr. Patrick, President & COO, Apollo Investment Corporation ............ 67 

(V) 

(1) 

FULL COMMITTEE HEARING ON EXPANDING 

EQUITY INVESTMENT IN SMALL BUSINESS 

Thursday, March 26, 2009 

U.S. HOUSE OF REPRESENTATIVES, COMMITTEE ON SMALL BUSINESS, Washington, DC. 

The Subcommittee met, pursuant to call, at 10:00 a.m., in Room 

2360 Rayburn House Office Building, Hon. Jason Altmire [chairman of the Subcommittee] presiding. 

Present: Representatives Altmire, Ellsworth and Fallin. 

Chairman ALTMIRE. I now call this hearing to order. 

This hearing of the Investigations and Oversight Subcommittee 

is called to order, and there is no question that the recession has 

hurt the balance sheets of small businesses. Profits are down in 

nearly every industry, and conventional forms of financing from 

bank loans to credit lines are limited. 

Under normal circumstances, accessing capital is something of 

an obstacle. Since the dramatic meltdown of our financial markets 

last September, accessing capital has become especially challenging 

and not just for businesses seeking traditional funding. Even high 

growth start-ups are struggling to secure equity investment, such 

as venture capital. 

Historically, high growth firms have relied on equity capital to 

get their businesses off the ground. For entrepreneurs who have 

solid business plans but lack immediate marketable products, venture capital and angel investment financing is crucial to the success of these companies. These forms of financing allow these companies the time they need to research and develop. In some cases 

funding may also come with managerial and technical experience. 

These kinds of resources have helped launch countless new businesses from software start- ups to biotech firms. 

Many of today’s industry leaders and innovators from Apple 

Computers to Sun Microsystems got off the ground with equity capital, and yet today this important form of investment has become 

increasingly hard to come by. In my home region of Pittsburgh, we 

have had the opportunity to team up with businesses in Cleveland 

Ohio to help facilitate venture capital investments. This partnership has attracted over 80 national venture capital funds to invest 

in more than 60 health care venture capital investments in the 

tech belt region. 

Cleveland and Pittsburgh are now ranked second and third in 

national health care investment. Although this is one good example 

of the high quality investments that can be achieved through venture capital, it is important to consider how the current economic 

2 

situation is affecting these investments. By one estimate the Small 

Business Administration leaves $60 billion in unmet capital needs 

annual, and in an economic downturn these additional needs must 

be met elsewhere, such as venture capital, angel investing and 

other equity investing mechanisms. 

In today’s hearing we will discuss the decline in these investments and look for ways to respond to this challenge. Equity capital is the fuel that feeds the start-up communities’ best and brightest. These are the businesses that create new jobs and revolutionize entire sectors of the economy. In 2006, angel investment 

alone helped generate 200,000 positions. Equity investment not 

only spurs small business growth, but also sparks the development 

of new products and industries. 

Unfortunately, however, the deepening recession has dampened 

the equity capital markets and stunted small business growth. 

Amid growing uncertainty in the economy, many venture capital 

and angel investors are pulling back. In the last quarter of 2008, 

venture capital investments plunged $5.4 billion. That is more than 

a 33 percent drop from the same time last year. 

Meanwhile angel investment has also declined considerably. In a 

recent study by the Angel Capital Association, half of those surveyed said they had invested less than expected in 2008 and onethird predicated their investments would decline again this year. 

The current investing climate is the most tentative we have seen 

since the dot.com meltdown nearly a decade ago. Few industries 

have been untouched by this downturn, and it goes without saying 

that businesses of all sizes are suffering. 

Of course, this will not always be the case, and once the clouds 

begin to clear and the economy starts to recover, we expect to see 

renewed growth in investment. In the meantime, there are a handful of policy measures worth considering, which we will touch on 

today. Those initiatives have the potential to not only bolster the 

entrepreneurial community, but jump start the economic recovery. 

Small businesses will play an integral role as the country continues to work its way out of this recession. Following the downturn of the mid-1990s, entrepreneurs stepped up to the plate to create 3.8 million new jobs. Much of that growth was fed by equity 

capital, and many of those businesses, mere start-ups at the time, 

have since grown into industry leaders. 

Entrepreneurs can help initiate that same kind of transformation 

today, but not without the resources necessary to create the new 

products that unlock those new markets. 

I look forward to hearing our witnesses’ thoughts on how we can 

help small businesses survive during this economic downturn, and 

I thank them in advance for their testimony. 

And with that, I would like to yield to Ranking Member Fallin 

for her opening statement. 

Ms. FALLIN. Thank you, Mr. Chairman, and good morning to all 

of our panelists. We appreciate you joining us today. We know that 

you are all very busy trying to make money. So we thank you for 

coming to testify. 

And, Mr. Chairman, I want to say just thank you for calling this 

very timely meeting on an important subject for our nation and especially for our small businesses and for our venture capitalists 

3 

and our entrepreneurs of our nation who I believe are the backbone 

of America and ones who generate our jobs and help move our 

economy forward, and especially during these challenging times for 

our nation. We need to do all that we can to support our businesses 

and especially encourage innovation and entrepreneurship. 

So thank you all for coming here today and welcome to our Small 

Business Committee. We want to listen to you to hear from the experts in the industry and to be able to share this information today 

with our colleagues here in the House. 

Over the past several months this Committee has held numerous 

briefings detailing the credit crunch that is affecting America’s 

small businesses, and due to the worsening economy, small businesses are finding it is very hard right now to find the capital that 

they need to purchase inventory to make payroll, to pay rent, to 

support their businesses, and it is a very tough time. 

The credit crunch affecting small businesses has been well documented. We know that it is an issue. No less of a problem although 

and maybe somewhat less publicized is the current shortfall in equity investment. We in Congress must look at all ways that we can 

stimulate small business growth as this will play a vital role in our 

nation’s economic recovery. 

Equity investment, which includes the venture capital, the angel 

investing and private equity, has played a crucial role for a long 

time in the formation of small businesses for many decades. Unfortunately, these concepts are often some of the most misunderstood 

in entrepreneurship. 

Now, it was commonly held that venture capitalists are involved 

only in early stage financing of relatively small, rapidly growing 

technology companies. This type of investment may be better 

viewed as a professionally managed pool of equity capital in exchange for a piece of ownership in the pie. Venture and angel capitalists provide a wide range of services from finding additional investors to financial planning, to providing very valuable skills to a 

firm and to a business, and not surprising, the current economic 

conditions are having a negative impact on the amount of money 

that is available, the size of the venture capital investments in 

small businesses. 

Global financial markets have constricted dramatically, and 

there is little doubt that we are facing some unprecedented economic times. And due to this ongoing turmoil, businesses especially 

or small businesses are finding it very difficult, as the Chairman 

just stated, to raise capital from banks or even in the stock market. 

And there are times, I must say, I wonder about how we are affecting that by some of our talk here on Capitol Hill. 

Following public exchanges have been having a double impact on 

the companies seeking financing not only for the devaluing of private stock values and holdings, but also wiping out vast amounts 

of equity capital. When private investors see their portfolios shrink, 

they become more conservative. Money that might have gone to 

early stage private investments is sometimes headed off to safer 

harbors like CDs, mutual funds, or even bonds. 

And the amount of money involved nationally fluctuates from 

year to year, but over the past three years, venture capital dollars 

4 

invested in the total number of deals have remained somewhat 

steady, around $28.6 billion and around 3,811 deals per year. 

That being said, 2008 saw the first yearly decline of total investments of venture capital since 2003. Venture capitalists investments in 2008 experienced an eight percent decrease in dollars, a 

four percent decrease in deal volume from 2007, and this decline 

in investments has reached all industries. I do not think anybody 

has been immune from it in all stages of development. 

So this hearing today is to allow us as members of the Small 

Business Committee an excellent opportunity to be able to hear 

from you, those of you who are working every day in these marketplaces, to know what we can do to better help you. 

And, Mr. Chairman, I will just say as I mentioned a few moments ago, I think sometimes our rhetoric here on Capitol Hill and 

maybe in the national media, some of the policies have really had 

an effect upon all of our investors, our entrepreneurs in raising 

money. I had the opportunity to visit with some of our small business owners from across our nation this week, and one of the 

things they told me was they said in these challenging times for 

our business community and with a recession and the different policy changes that are being debated here in Washington where they 

are dealing with financial markets, where it is dealing with stability, Wall Street, whatever it might be, they said just quit changing the rules on us. You know, we do not know from day to day 

what is going to happen with bailouts, stimulus, all the different 

things that we are debating here in Washington. Just do not 

change the rules. Just give us some certainty, and we will let loose 

our money and we will spend it. 

Right now we are scared. We are worried in a way that it is talking about raising capital gains, talking about raising corporate income taxes, taxes on small businesses. All of those things concern 

our business and our investors, and the equity markets. 

So we are looking forward to hearing from you. We have been 

very blessed in Oklahoma to have OCAST, Oklahoma Center of 

Science and Technology, and some state funds and many different 

venture capital funds in our state, and I know it is very important 

to not only our state, but to our nation. 

So thank you, Mr. Chairman, for bringing up this issue and holding that hearing today. We appreciate you, and I will yield back my 

time. 

Chairman ALTMIRE. I thank Ranking Member Fallin, and I also 

want to thank Congressman Ellsworth for being here from Indiana. 

We look forward to hearing from him later. 

And I want to explain to the witnesses the process we have. We 

are going to move from your left to your right across. We are going 

to introduce you one at a time, and you have five minutes to speak. 

The light that you see in front of you is going to start on green. 

When you have one minute left it is going to turn yellow, and when 

you are out of time, it is going to turn red, which means sum up, 

but I will be lenient. 

I thank you all for being here because you do have other places 

you could be a this point, but this is an important enough issue to 

you that you made the trip, and we do want to thank each and 

5 

every one of you for offering your expertise to the Committee, and 

we look forward to hearing from you. 

Now, Ms. Pamela Hendrickson is Chief Operating Officer of the 

Riverside Company, a private equity firm with headquarters in 

Cleveland and New York, which focuses on investments in small 

and middle market companies. 

Ms. Hendrickson. 

STATEMENT OF PAMELA HENDRICKSON, CHIEF OPERATING 

OFFICER, THE RIVERSIDE COMPANY 

Ms. HENDRICKSON. Thank you. 

Chairman Altmire, Ranking Member Fallin, thank you very 

much for having me this morning. 

As you said, I am Pam Hendrickson, Chief Operating Officer of 

the Riverside Company. We’re a private equity firm that has spent 

the last 21 years investing in small companies around the world. 

Recent newspaper headlines might have some people believing that 

the private equity industry is made up of former investment bankers who used black box financing to acquire companies in big cities 

and then vaporized the assets and the employees. That is not what 

we do. 

We have invested $1.8 billion in 211 companies. We work with 

them for about five years, and when we sell them, typically their 

earnings have risen by 100 percent. Today I want to talk for a few 

minutes about how we do that. 

Unlike venture, which helps companies in the start-up phase of 

their life cycle, we help companies that are in a bit of a later stage. 

We have three mechanisms by which we create value. 

First, we increase the earnings of the companies we buy. 

Second, we earn a bigger multiple upon sale because we have 

built a much stronger company. 

And, third, on occasion we restructure the balance sheet. 

I am happy to tell you only eight percent of our gains have come 

from restructuring the balance sheet. For us it is all about growth. 

About 60 percent of the companies we buy are family owned 

businesses in small communities, like Oneida, New York or Paris, 

Kentucky. The founders and owners typically have most of their 

net worth tied up in these companies, and when they decide to sell 

their business, it is generally because they are seeking liquidity for 

retirement or to secure the financial future of their families. 

For example, we purchased CPI, a training company based in 

Brookfield, Wisconsin. The company was for sale because the owner 

had been diagnosed with a terminal disease and wanted to insure 

that his employees would be safe and his business would be ongoing. 

We quickly evaluated this opportunity and were able to close this 

transaction in 30 days. Today, through the addition of new programs, some international growth and some modest price increases, 

CPI has increased its sales by 25 percent, and the employees are 

prospering. 

On other occasions we work with young management teams that 

need both capital and additional expertise to grow, one in Washington, Pennsylvania, in fact, and sometimes we actually create a 

small business from what we affectionately call a corporate orphan, 

6 

a non-core division of a large company that has suffered due to lack 

of capital and attention. 

Such was the case with Just Right Manufacturing in Mattoon, Illinois. Just Right was a division of Federal Signal, a manufacturer 

of safety products that help prevent catastrophic industrial accidents, and it really needed attention. We bought it, founded a top 

management team, and realigned its pricing strategy. 

Since our acquisition, the company has grown earnings 40 percent and kept a lot of jobs in Mattoon. 

We help our companies in many ways other than simply providing capital. First, we give them access to our strong lender network. In 21 years, our senior lenders have lost money only once. 

So they like working with us. Our debt ratios are low, 2.9 times 

operating earnings versus the industry average of four and a half 

times. 

Second, we pool the purchasing power of our 50 U.S. companies 

so that they get the benefit of being part of something bigger. For 

example, on a pooled basis, our company spent $25 million with 

FedEx so that each of them gets treated like Hewlett Packard. 

Third, we have done a tremendous amount of work helping our 

companies manage their health care benefit costs. Through our programs we have held per employee per year cost nearly flat since 

2006 at $8,000. The industry average is 36 percent increase. 

Recently we actually got a nice compliment from the United Steel 

Workers who were impressed that we were able to continue offering such great benefits. 

We also improve financial controls and bring in strong outside directors. As the PE industry continues to contribute increasing percentages of GDP, it is understandably gaining the attention of the 

regulatory bodies just across the aisle, I think. One area of particular concern to us are the new FASB 157 or mark to market regulations. While we fully support marking to market and have always done so, the new regulations require that we use outside resources and a more public company approach. Last year we did a 

transaction every eight days. So we are constantly in the market, 

and we really know how to value companies. 

Unfortunately, we are now being forced to value companies during our hold period in a way that is different from how we value 

them ourselves when we buy and sell them. In addition, these regulations are costing our investors an additional $500,000 per year 

due to the additional time required from our auditors and outside 

consultants. 

Getting the U.S. economy out of the doldrums will undoubtedly 

be driven by the growth of small business, but we need debt, and 

despite our great lending relationships, the debt markets remain 

tight. We have wondered whether there might be an opportunity 

for some form of public-private partnership through which the SBA 

could provide some debt at the fund level. 

We have a lot of skin in this game, and the future of our firm 

is based purely on our track record. Just as companies compete for 

capital so we compete for investor capital. It’s a very democratic 

process, not based on status or where we went to school, but based 

purely on our performance. So we have to grow our companies. 

Thank you. 

7 

[The prepared statement of Ms. Hendrickson is included in the 

appendix at page 24.] 

Chairman ALTMIRE. Thank you, Ms. Hendrickson. 

Now we will turn to Sherrill Neff. Mr. Neff is founding partner 

of Quaker Bio Ventures, a venture capital firm located in Philadelphia that invests primarily in life science companies with outstanding growth potential. Mr. Neff is testifying today on behalf of 

the National Venture Capital Association, the leading trade association that represents the U.S. venture capital industry with over 

450 member firms. 

Welcome, Mr. Neff. 

STATEMENT OF P. SHERRILL NEFF, QUAKER BIO VENTURES, 

ON BEHALF OF NATIONAL VENTURE CAPITAL ASSOCIATION 

Mr. NEFF. Thank you, Mr. Chairman, Ranking Member Fallin, 

Mr. Ellsworth. 

I am a founding partner of Quaker BioVentures, which is a 

Philadelphia based venture capital firm investing only in life 

sciences companies with outstanding growth potential across all 

stages of development. We raise money from institutional investors 

of many types and invest those funds for the long term in innovative start-up companies. All of our funding and efforts go toward 

company growth, not financial reengineering. 

In most cases, venture capital is the only funding source for 

these companies at their stage of development, as the risks are way 

too high for traditional bank and other financing. Venture capital 

is a relatively small asset class, and it should probably stay that 

way, with approximately $28 billion, as Representative Fallin mentioned, invested on an annual basis over a fairly consistent period 

of time, with a notable blip in the early part of the 2000-2001 period. 

Last year that capital went into 3,800 different companies in the 

United States. Despite our size, our industry has created exponential value for that investment dollar. Venture backed companies 

account for more than 10.4 million United States jobs and $2.3 trillion in U.S. revenues, or 18 percent of the entire GDP. And we estimate that one out of three Americans have benefited personally 

and directly from venture backed medical innovation. 

Organ regeneration and development of drug therapies for 

macular degeneration are just two of many, many innovations represented in our portfolio of over 30 companies, which also contribute thousands of jobs to the regions in which we invest. 

While the venture capital community is not in need of rescue by 

any means and, in fact, has money available to invest in emerging 

growth companies, there are critical ways in which policy makers 

can support our efforts to continue to build innovative American 

companies. 

First, we support maintaining capital gains tax treatment for the 

carried interest portion of our investment return. This tax policy 

has proven to motivate venture capitalists to make long-term investments in creating new companies and jobs that did not exist 

before. Encouraging this investment behavior is exactly what Congress intended when it enacted capital gains tax legislation many, 

many years ago. 

8 

It is critical that VCs continue to be rewarded in a manner commensurate with the huge risks we take. Otherwise our risk-reward 

equilibrium will be thrown off, and even highly promising companies will not get funded because we cannot justify the risk. 

The President’s budget has a provision to change the carried interest tax rate to ordinary income effectively tripling taxes of those 

most responsible for new company creation. At a time when our 

country needs to create jobs, such a change is counterproductive for 

economic growth. We ask that you look very carefully at each industry impacted by the change in the carried interest tax rate and 

enact policies that are fair but continue to promote long-term investment rather than to choke it. 

Next, we need government funding for basic research to fuel the 

innovation pipeline from which we draw to create our companies. 

A great example in our portfolio is a company based in Connecticut 

called Optherion, developing truly novel therapies for macular degeneration. 

Optherion was created from NIH funded technologies in four universities, the University of Iowa, the University of Pittsburgh Medical Center, Rockefeller University, and Yale University. We have 

combined all of these technologies together with an experienced 

management team, have raised over $30 million in venture capital 

funding, and the company’s drugs will begin human testing later 

this year. 

We applaud the allocation of a significant chunk of stimulus dollars to continuing basic scientific research in the universities’ academic centers. 

In other areas, such as the SBIR grant program, venture backed 

companies have been unfairly excluded, in our opinion, from applying as there is a misconception that venture backed companies are 

not small businesses. This, as you know, is not true. Venture 

backed companies are often without revenues and with employee 

counts in the single digits. Without federal funding these companies often cannot move forward with basic research projects. 

We commend this Committee for passing legislation last year addressing this issue and hope to permanently resolve this issue this 

year. 

Third, we ask that the government look at the many instances 

where regulation has created additional burdens and uncertainties 

that threaten the growth of small companies. For instance, many 

companies are struggling with the cost of Sarbanes-Oxley compliance, which continues to place a very expensive burden on small 

entities. 

In our sector, the life sciences sector, regulatory uncertainty at 

the FDA continues to have an adverse impact on our ability to 

make investment decisions. When the rules are changing, you do 

not know what you are investing in, and it is very, very difficult 

to decide that without clarity. 

Lastly, the government can protect innovators better through an 

approach to patent reform that recognizes the disproportionate burden for smaller companies when defending against patent infringement. This protection in our opinion should include a post grant review process that is limited to a very short period, 12 months, so 

9 

that small companies are not subject to endless patent challenges 

by large corporations. 

It also involves meaningful infringement penalties in situations 

so that we can really deter large companies from infringement that 

today is not adequately costly to them. 

Another area of protection that is important to us is the protection of companies that have invested millions of dollars, decades of 

development, bringing novel biologic therapeutics to market. If generic alternatives are allowed to enter the market shortly after the 

original is made available, the original innovators will not be able 

to recoup their investments. No investor will be able to fund them 

profitably, and innovation will stop or slow. 

The venture capital industry remains committed to investing in 

the most promising innovative small businesses our country has to 

offer, but we need to maintain an environment that allows these 

companies to thrive. As Congress considers policies that impact 

start-ups and the start-up community, we appreciate the opportunity to offer an ongoing voice that supports the viability and 

growth of these entities. 

Thank you. 

[The prepared statement of Mr. Neff is included in the appendix 

at page 36.] 

Chairman ALTMIRE. Thank you, Mr. Neff. 

And to introduce the next witness, Mr. Walker, I will turn it over 

to Ranking Member Fallin. 

Ms. FALLIN. Thank you, Mr. Chairman. 

We are very pleased to have a fellow Oklahoman up here today, 

Mr. Tom Walker who is the President and Chief Executive Officer 

of I2e. He brings tremendous energy and leadership to the creation 

of commercialization and entrepreneur development initiatives in 

Oklahoma’s advanced technology sector. 

And Tom is a founding member of the Board of Directors of the 

National Angel Capital Association, serves on the board of the 

Oklahoma Biosciences Association and the Oklahoma Manufacturing Alliance, and has been a great leader in our state in venture 

capitalism. 

So, Mr. Walker, we are glad to have you here. 

STATEMENT OF TOM WALKER, PRESIDENT AND CEO, I2e, ON 

BEHALF OF BIOTECHNOLOGY INDUSTRY ORGANIZATION 

Mr. WALKER. Thank you. It is my privilege, Chairman Altmire, 

Ranking Member Fallin, Mr. Ellsworth. 

Thank you for this opportunity to testify today regarding the difficulties facing the venture capital and angel capital industries, and 

in particular, how it is impacting the biotechnology industry. 

My name is Tom Walker. I2e is a nonprofit corporation in Oklahoma that assists advanced technology companies, and we provide 

specialized commercialization services and access to risk capital in 

the earliest stages of a company’s life, especially to those companies facing the funding gap that we commonly refer to as the valley 

of death. We accomplish our goals through the assistance of the 

State of Oklahoma actually, through OCAST. We have invested in 

over 100 start-up companies over the past ten years. 

10 

However, today I am testifying on behalf of the Biotechnology Industry Organization, an organization representing more than 1,200 

biotechnology companies, academic institutions, state biotechnology 

centers, and related organizations involved in the research and development of health care, agriculture, industrial and environmental 

biotechnology products. The overwhelming majority of biomember 

companies are small, early stage, research and development oriented companies. America’s leadership position in this industry 

today is really threatened by the economic environment that we 

find ourselves in. 

The total capital raised by the biotech industry has fallen 56 percent in the last year. Almost half of all public U.S. biotech companies have less than one year of cash remaining on hand. The 

amount raised through initial public offerings has fallen by 97 percent, from $1.9 billion to $5.8 million. The slowdown in private investments has been dramatic as well, as venture capital investors 

find they can no longer afford the high risk that is characteristic 

of investment in biotech. 

So I will briefly mention a few approaches to sustain emerging 

biotechnology companies in this time of need. First, allow small 

companies access to the NIH Recovery Act funds. As part of the 

Economic Recovery Act, Congress appropriated $8.2 billion to the 

National Institutes of Health. These dollars will largely be used for 

basic research and must be spent within the next two years. 

Historically, NIH grants go to research institutions. So if we 

could just allow a small percentage of those funds, the Recovery 

Act funds, to go to small businesses, it would have a tremendous 

impact in this time of need in developing new technologies and 

therapeutics, things of that nature in the biotech industry. 

Second, we should enact new tax incentives for investment in 

biotechnology. One thing in particular, President Obama’s budget 

proposed to eliminate capital gains taxes on investments in startup companies. Yet details on this proposal have not been forthcoming. So I would urge members of Congress to work with the 

Obama administration to refine the proposal in order to make it as 

useful as possible for small, capital intensive companies greatly in 

need of new funds. 

Third, I would like to bring up amending the SBIR eligibility 

rules related to venture capital. This has been a highly successful 

program for injecting government dollars into small, innovative 

firms. The SBIR program currently excludes companies that receive a majority of their funds from venture capital investors. So 

enactment of the SBIR reauthorization and considering changes to 

allow for greater participation of companies that receive VC funds 

is more important than ever in this current economic climate. 

Fourth, I would like to consider creating a funding mechanism 

for high growth companies, a new funding mechanism, perhaps a 

grant, even a loan program that is really targeted to high tech companies, really targeting a specific stage even for those companies 

that are unable to raise funds should be considered. This program 

need not be permanent or add to the deficit, especially if structured 

properly. I think there are terrific best practice examples at the 

state levels that we could look at to really model a program for the 

SBA. 

11 

A private investors wait on the sidelines for the financial markets to recover, government can help to fill the funding gap 

through narrowly targeted measures. I would suggest that we are 

far better off spending a little money today rather than seeing a 

whole generation of America’s most cutting edge, science based industries decimated by the current capital environment. 

Thank you. 

[The prepared statement of Mr. Walker is included in the appendix at page 48.] 

Chairman ALTMIRE. Thank you, Mr. Walker. 

We turn to Catherine Mott. Catherine Mott is the founder and 

CEO of BlueTree Capital Group, an organization located in Wexford, PA, that provides the professional staff to facilitate and manage the Allied Angels organization. 

In 2003, Catherine Mott started Western Pennsylvania’s first 

business model angel network, BlueTree Allied Angels. 

Welcome, Ms. Mott. 

STATEMENT OF CATHERINE MOTT, FOUNDER AND CEO OF 

BlueTREE CAPITAL GROUP, LLC 

Ms. MOTT. Thank you, Chairman Altmire and Ranking Member 

Fallin and all of the members of the council. 

I took the liberty to title my discussion today ‘‘Entrepreneurs 

Can Lead Us out of the Crisis.’’ Before I elaborate on the title, 

please allow me to explain my company’s BlueTree Capital Group 

and BlueTree Allied Angels. 

BlueTree Capital Group was created as an entity to purposefully 

aggregate angel investors to invest in early stage companies. We 

are a member of the Angel Capital Association, our professional 

support organization whose testimony you will hear from John May 

today. Because BlueTree is located in Pittsburgh, PA, we are fortunate to be strengthened by three outstanding universities that 

serve as very fertile ground for a multiple spin-out of ideas into 

companies. 

Please do not confuse us with Silicon Valley, Boston or San 

Diego. We are Midwest town with a very small but vital venture 

capital presence. The companies created in Pittsburgh are less likely to be funded by VCs or even by super rich angles like Marc 

Andreessen, who is the founder of Netscape, but instead they are 

funded on the backs of hard working professionals whose average 

annual salary is between 200 and $400,000. 

I tell you this because most angel investors look like us, not like 

Marc Andreessen, whose multiple millions lead people to think that 

they can invest in start-ups under any circumstance and in any 

economic climate. 

The average angel investor in the U.S. is at the lower end of the 

wealth spectrum and is not located in Silicon Valley or Boston. 

This is an important distinction for the Committee. The current 

economic crisis has crippled the average angel investor’s ability to 

invest because their net worth has dropped to a point where they 

no longer can place marginal capital at risk on start-up companies. 

At BlueTree Allied Angels, since September 2008, two-thirds of 

our 53 investors have ceased investing in early stage companies. 

Why should this matter? Well, it matters because they fund compaVerDate Aug 31 2005 18:13 Apr 23, 2009 Jkt 000000 PO 00000 Frm 00017 Fmt 6633 Sfmt 6633 G:\CLERKS~1\HEARINGS\TRANSC~1\47799.TXT DARIEN
12 

nies that banks or other sources of capital will not or cannot fund. 

It matters because these investors are the mechanism that fills the 

funding gap between friends, family, and institutional financing. 

Without this mechanism, there would be no Alcoa today. It matters 

because entrepreneurs are the fertile soil for job growth and recovery. It matters because funding entrepreneurs can lead us out of 

the economic crisis. 

This recessionary crisis is more than a downturn caused by bad 

lending practices and Wall Street avarice. The greater underlying 

dynamic is at work and it has been at work for some time. A fundamental change is taking place in the global marketplace. It is a 

rapidly changing, technology driven global economy. 

The United States, the nation that brought the world electricity, 

the telephone, radio, TV, and the personal computer, could be losing the race for its own history. China, Germany and India and 

other countries are aggressively encouraging and setting the stage 

for an economy that will flourish in this new technology driven age. 

For example, contrast the U.S. capital gains tax rate to the zero 

percent capital rate and Hong Kong, Singapore, and even Germany. The current U.S. economy and its tax policies are not built 

for this rapidly changing, technology driven new world. 

In addition to fixing our U.S. debt and credit infrastructure, the 

U.S. needs a healthy equity capital infrastructure that can rapidly 

respond to the demands of a new age and the new competitive 

forces of the world. The real danger for the U.S. lies in merely fixing the old economy and ignoring the new economy. 

Only entrepreneurs have the flexibility, the freedom and the risk 

everything ambition to find the path back to prosperity, and it is 

the passion and commitment of angel investors funding these entrepreneurs that makes it possible. Yes, passion and commitment; 

about half of the angel investors provide more than money to entrepreneurs. They provide experience, guidance, business consulting, 

and contacts from their Rolodex. 

The passion and commitment also exist in tolerating investment 

loss. Like our venture capital friends, in an average angel investor 

portfolio of 18 companies, the angel investor will see five of these 

companies go bankrupt and only one or two will deliver an outstanding return. It might be better explained metaphorically. Five 

will strike out, ten will make it to first or second base and return 

a moderate amount of capital to investors, and one and maybe two 

will be a Hank Aaron home run. 

The hidden cost of this economic crisis is that angels have lost 

their wings. They are retracting as a result of the weak market 

and a stymied economy. I greatly appreciate the opportunity to 

speak with you today because as policy makers, you can make a 

difference by setting a tone with legislative initiatives that can help 

reverse the downward spiral of investing in business building and 

job growth. 

Regardless of where we fall in the political spectrum, all of us 

in this room have to agree that innovation and building businesses 

are imperative elements of American economic strength. There 

have been recent policy initiatives to restore our national communications and travel infrastructure, but that infrastructure has no 

value unless we restore the financial infrastructure for building 

13 

sustainable companies. Nice, new bridges do not mean a thing unless we are creating sustainable jobs whose tax base can pay for 

the nice, new bridges. 

If capital does not start flowing soon to start-ups and early stage 

businesses in this country, we will be faced with years of lost innovation. We will lose the good paying jobs and the healthy tax base 

to other parts of the world that are aggressively facilitating innovation and start-up companies. I hope you will consider the six suggestions that are in my brief that I have submitted to you, and I 

appreciate this opportunity to speak. 

Thank you. 

[The prepared statement of Ms. Mott is included in the appendix 

at page 54.] 

Chairman ALTMIRE. Thank you, Ms. Mott. 

We will hear next from Mr. John May. He is the founder and 

managing partner of New Vantage Group, a leading angel investment firm that mobilizes private equity into early stage companies 

and provides advisory services to both funds and private investors. 

Mr. May is testifying today on behalf of the Angel Capital Association, the leading organization of angel groups with over 165 member groups and another 22 affiliate organizations throughout North 

America. 

Thank you for being here, Mr. May. 

STATEMENT OF JOHN MAY, NEW VANTAGE GROUP, ON 

BEHALF OF ANGEL CAPITAL ASSOCIATION 

Mr. MAY. Thank you, Chairman Altmire, Ranking Member Fallin 

and Mr. Ellsworth. 

It is great to be here and to be included in this discussion. I actually have enjoyed organizing angels, high net worth individuals in 

this Washington, D.C. area, and it occurred to me I should extend 

an invitation. Any time you want to see the way we operate, come 

on and let us know and you will come to attend a breakfast meeting with us. I will not charge you for the first meeting, and we really would enjoy sharing with you this new phenomena of angel 

groups as opposed to sole practitioners. 

The Angel Capital Association is only six, seven years old. It 

came out of a great relationship with the Kauffman Foundation in 

Kansas City, and it really is the organization which is trying to 

professionalize and to learn best practices on how to grow early 

stage companies with the time and money of high net worth individuals, as opposed to institutional money, to round out our community. 

As you know, start-up companies and high growth companies 

need capital beyond the customer, beyond bank financing, and 

what is a uniquely American phenomenon over the centuries has 

been individuals investing their own after tax dollars in strangers’ 

opportunities to try to get high growth companies to provide jobs 

and economic development in their region. Ninety percent of us invest within one or two hour drive time of our own community, and 

we look for long-term capital gain, and we will touch on that in the 

testimony. 

We have been organizing the development of these angel groups. 

We have realized in the little bit of research that is done we are 

14 

probably at about the same size in terms of capital deployed as the 

institutional venture capital industry, about 25 to $30 billion a 

year, but our groups tend to do 50,000 or 100,000 transactions a 

year in all 50 states, whereas as you know, the traditional institutional venture capitalists are really looking for the cream of the 

crop and heavily are dominated by larger transactions into a smaller number of high growth companies. 

What we are trying to do is to develop the local high net worth 

individuals doing it (investing) to develop our own local economy. 

We have a real problem in today’s economy because the engine of 

angels’ activity is their own personal net worth, and that is down, 

as you know, in the economy. So we mention that the number of 

angel investors is going to be reduced by this economic crisis. Their 

propensity to spend their wealth on high risk, early stage ventures 

is down right now. That needs to be reinvigorated, and just as entrepreneurs are finding people who have left and been laid off are 

starting businesses, and entrepreneurs are looking for capital, the 

banks, and institutional venture capitalists and so forth are not as 

robust as they were. 

So what can we suggest? So in the testimony we just suggest five 

areas that we would like to suggest that might be appropriate for 

governmental attack, and we can hopefully have a dialogue and 

talk about these in a few minutes. 

One obviously is tax policy. Low long-term capital gains is the 

underlying commitment that we have to spend our time and our 

money for three, five, seven years. Obviously the most important 

thing would be to not have that highly taxed when it comes out. 

So angels are very dependent upon a 15 percent or lower capital 

gains tax rate. 

Second, the idea of many states, 22 states in the United States, 

and many foreign countries have tax credits that are applied to the 

investment that you make in a qualified company so that you are 

incentivized and can diversify your portfolio further because you 

get a 20, 25 percent tax credit for taking this risky investment. It 

has been done at the state level successfully in the United States, 

including some of the states represented here. We would recommend that you look at not only the capital gains tax rate, but 

the pros and cons. 

Maryland, for example, has a 50 percent tax credit for an investment in a biotechnology company, but it only has a certain amount 

of capital, six million a year, and they sit in line on July 1st to be 

able to have the company apply for its position in that pool of six 

million, and it is exhausted usually in the first half of the year. So 

there is something here that incentivizes individuals. 

Next, education training and awareness. Think of just a few dollars were used at the university level, at our nonprofit, the Angel 

Capital Education Foundation to further in all 50 states the development of angels, the encouragement of entrepreneurs to approach 

high net worth individuals and have less mystery and the whole 

idea of how to approach an angel, how angels should develop their 

risk profile of making these investments. 

I am the lead instructor in one such Power of Angel Investing 

Seminar, and you should just see the light go on when people are 

15 

sitting there in Charleston, South Carolina, in Boise, in Chicago, 

and realize that you can do this with some help. 

Third, we really do think we should keep angel investing at a 

private level. We do not see any need for a governmental office or 

an SBA program to highlight angel education activity, Website development. We think that is best done at the private level. It is tax 

policy and some other things that might need governmental hand. 

Fourth, accredited investor standards have been very constant 

over the last two decades. We would prefer not to see any change 

in the sophistication standard that is used by the SEC to allow for 

angels and entrepreneurs to deal with high net worth individuals 

as accredited investors, the million dollars of net worth, for example. 

There has been some discussion of indexing that or changing 

that. That would be detrimental to entrepreneurs because then the 

sophisticated angels would not necessarily have that position because it was raised. 

And last, there is the idea of leveraging private equity, and similar to Tom’s discussion, we would urge you to think about a loan 

program or a co-investment program similar to Scotland and some 

of the other countries of the world where if an angel or an angel 

group makes a commitment, does the due diligence and has a relationship with an entrepreneur and takes risk capital and makes 

the investment, the idea would be that this loan program or a federal program would match that to some degree and then would 

make the government entity an investor in these companies, but 

would not need any bureaucracy, would not need any administration. It would follow an angel group that would make the investment, and it would increase the money that was available to entrepreneurs. 

I have gone on too long. I apologize, but I do want to suggest that 

there is a lot of meat here that we would love to have further discussion with you afterwards, and we are always available at 

angelcapitaleducation.org to answer any questions that you might 

have. 

[The prepared statement of Mr. May is included in the appendix 

at page 59.] 

Chairman ALTMIRE. Thank you, Mr. May. 

Finally we will hear from Mr. Patrick Dalton. He is the President 

and Chief Executive Officer of Apollo Investment, a leading provider of investment capital for small, middle market companies 

generating both current income and capital appreciation through 

debt and equity investments. 

Welcome, Mr. Dalton. 

STATEMENT OF PATRICK DALTON, PRESIDENT AND COO, 

APOLLO INVESTMENT CORPORATION 

Mr. DALTON. Thank you, Chairman Altmire, Ranking Member 

Fallin, Mr. Ellsworth. 

I am very pleased to be here today. My name is Patrick Dalton. 

I am the President and Chief Operating Officer of Apollo Investment Corporation, an SEC regulated business development company commonly known as a BDC. For five years since our IPO, 

Apollo Investment Corporation has invested over five and half bilVerDate Aug 31 2005 18:13 Apr 23, 2009 Jkt 000000 PO 00000 Frm 00021 Fmt 6633 Sfmt 6633 G:\CLERKS~1\HEARINGS\TRANSC~1\47799.TXT DARIEN
16 

lion dollars in 124 small and middle market companies across the 

U.S., and today we have up to $700 million of available capital on 

our balance sheet. 

As successful as our company and our industry have been, I am 

here today to let Congress know that the mission that this body 

gave to BDCs 29 years ago to provide much needed capital to small 

and mid- size companies is in danger unless prudent policy steps 

are taken now. 

I am not here to ask for money. Far from it, I am here to ask 

for some common sense policy help so that we can use the money 

that we already have to originate new loans and to support the 

very companies that this Committee feels so strongly about. 

But first, the good news. We estimate that the nation’s BDCs currently have a combined loan- investment portfolio of over $30 

billion that provides capital to over 1,400 small and middle market 

businesses. These loans are the life blood of these Main Street businesses that support over 1.2 million U.S. jobs. In 2007, we estimate 

that the BDCs provided approximately 50 percent of all the junior 

debt capital loans, known as mezzanine loans to small and mid-size 

businesses throughout the U.S. 

As many of you know, Congress created the BDCs in 1980 under 

amendments to the Investment Company Act of 1940, in direct response to the crisis in the capital markets that threatened small 

businesses in the late 1970s. Today we are in what many believe 

is a once in a century recession. Small and middle market businesses have once again been abandoned by the traditional sources 

of capital. 

BDCs remain among only a few investment vehicles that are continuously dedicated to lending to small businesses. Our industry is 

lending in excess of $30 billion. None of us wants to see capital of 

that magnitude withdrawn from or otherwise unavailable to small 

and middle markets. 

It is our strong belief that BDCs occupy a unique regulatory 

space. Like banks, we originate, restructure, and we make loans directly to companies with the intention of holding most of these 

loans to maturity. However, unlike banks, we are much less 

levered, with a maximum leverage ratio of debt to equity of a mere 

one to one. 

Further, we are required by statute to invest at least 70 percent 

of our capital in small and middle market U.S. businesses, and 

while we make similar discrete, hold to maturity loans as banks, 

BDCs are obligated to mark to market 100 percent of our loans, 

while the banks only mark to market a minority of their loans. 

We are regulated by the same division of the SEC as mutual 

funds, but we are not a mutual fund. We do not trade liquid securities. Instead, we make individualized loans. 

BDCs have always used fair value principles to value our portfolio. Prior to the implementation of FAS-157 in its interpretive 

guidance, the industry used fair value measurements based upon 

underlying credit fundamentals, that is, the collectability of interest and principal in the pricing of new mezzanine loans. 

Unfortunately, we have been forced by changes in the accounting 

rules in order to practice to fix what was not broken. The accounting community now requires that our illiquid assets be valued as 

17 

if they were trading assets being sold into a hypothetical market, 

too often drawn from a series of distressed asset sales or other illiquid assets that are not at all comparable to our individualized 

performing loans. We believe that this practice has caused artificial 

asset value write-downs for the BDCs without meaningful regard 

to the credit quality of our underlying assets and has misled investors. 

And most important to the mission of this Committee, the same 

accounting asymmetry results in many fewer loans and perhaps 

the succession of all origination activities to the small business 

community by the BDCs. Every BDC finds itself hoarding cash 

rather than making loans so that they will not trip their statutory 

one- to-one asset coverage test that I mentioned earlier. 

Apollo Investment Corporation I am very pleased to state has recently reported that we are in compliance with all of our covenants. 

Yet we still must be cautious about using any of our $700 million 

of available capital toward making new loans. We have, therefore, 

voluntarily chosen to curtail new lending activities until such a 

time that there is a resolution to this issue. This means that while 

we have the ability and the desire to lend, we are unable to do so 

because of the policy and interpretive guidance of FAS- 157. 

As many of you know, the leadership of this very Committee has 

written the SEC asking that regulatory reform be taken quickly before further deterioration occurs, but as of today, we are still in 

need of your help. We have made three suggestions to the Commission, and it is to those three suggestions that I want to return. 

First and foremost, we ask that the BDCs be expressly included 

in the work that the FASB and the SEC have been tasked with by 

the House Financial Services Committee to respond with improvements to mark to market accounting. If we are able to offer true 

value accounting for a hold to maturity loans, we could and we 

would resume lending. 

Second, we ask that BDCs be given temporary authority to raise 

preferred stock and treat those shares as equity rather than debt. 

And, third, we also ask you for temporary relaxation of the asset 

coverage limits. 

In closing, let me end where I began. I am not here to ask for 

taxpayer money. I am not asking for a bailout of an industry that 

made bad decisions. I am here solely to ask for your help in returning us to the public purposes for which you, the Congress, created 

BDCs 29 years ago. It would, indeed, be a shame if common sense 

did not prevail. 

Thank you. 

[The prepared statement of Mr. Dalton is included in the appendix at page 67.] 

Chairman ALTMIRE. Thank you, Mr. Dalton. 

For questions we will go back and forth, and I wanted to open 

up by asking Mr. Neff a question. 

In your testimony you talked about the large investments made 

by a small group of venture capitalists. Can you further explain 

why venture capital is so important to the economy in context with 

how what you do is different from the big buyout groups and the 

hedge funds? 

18 

Mr. NEFF. That is a lot to chew, but I will give it a try. When 

we come upon an investment that interests us, it typically has gotten either a terrific group of management around it if it is a raw 

start-up, and the idea is so compelling that we invest a lot of time 

and a lot of consulting help and a lot of effort in trying to understand the opportunity. 

And then when we do decide to try to put together a group of 

venture capitalists to actually form a syndicate to make an investment, at that point we give birth to that company or if it is a company that has been funded through the angel networks or through 

other programs, we then bring another round of investment intensity to the company and help to propel the next stage of growth. 

The important point is that our companies are receiving our capital in order to invest in research and development or in order to 

invest in job growth, and in order to invest in economic growth. 

These companies were not generally using any of our capital to pay 

off other shareholders, to buy positions of ownership from other 

shareholders, to repay debt and those kind of things that are shuffling the financial deck, if you will, but not being invested in core 

economic growth. 

So I think that venture can be contrasted from the buyout firms 

in that regard. Now, I do not mean to contrast ourselves unnecessarily from firms like Pam’s because they invest so much in growth 

equity at a slightly later stage than we do, but I think that there 

is definitely from a policy perspective; in my mind, there is a real 

difference between firms who primarily invest in job growth and in 

fueling company growth when compared with firms that generally 

invest in highly leveraged transactions and a reshuffling of the financial deck. 

Chairman ALTMIRE. Thank you. 

And I am going to ask another question, and then I am going to 

turn it over to Ms. Fallin. For this question I would like all of your 

opinions who have an interest in answering. We will start with Mr. 

Neff since we are on him. 

And in your testimony in particular you focused upon the President’s proposal to apply no capital gains tax for investments for 

small businesses, and from your perspective in the investment of 

the entire panel, how broadly should this tax be applied in order 

to maximize its benefits to the small business community? 

Mr. NEFF. I think there will need to be a lot of discussion in 

terms of what the parameters of its application are, but I think 

that if we can adequately define what a small business is and we 

can adequately define the purpose of the proceeds of the investment so that it creates jobs, so that it creates funding for research 

and development and early commercialization activities, I think 

that that is where that tax incentive ought to be focused. If it is 

focused instead on things that are less productive to economic 

growth, then that is where it ought to be cut off. 

Mr. MAY. At the Angel Capital Association conference summit 

that we had last year, about 380 credited investors representing 

the different groups, all of us were there, and this is herding cats. 

These are all very interesting people, but they all have a lot of 

opinions. 

19 

The one common public policy position we came up with that everybody agreed on was low or no long-term capital gains, and we 

would be very happy with the venture capital standard or whatever. 

It is time that makes a difference to us. So whether you make 

it two years, three years, five years, to have zero capital gain, that 

is the key thing that will keep angels, we believe, continuing to invest in start-ups. 

Mr. WALKER. I would just echo the other comments that were 

made. It is a definitional issue on what is a start-up or a small 

business that really needs to be defined, and then the use of proceeds and make sure that the infusion of capital is for economic development purposes. 

The time factor on the capital gains is really key to investors. 

Ms. HENDRICKSON. I agree with that. I think it is the time factor, 

and obviously private equity has been a little bit a the vortex of 

this in terms of the carried interest discussion, but you know, when 

you think about what we do, we are putting both our money and 

our sweat equity into a company that makes chimneys, and we are 

working with that company for five years. So if that is not a capital 

gain, I am not quite sure what is. 

Chairman ALTMIRE. Ms. Mott. 

Ms. MOTT. If I might add, it is more than the time frame element 

here at risk. We are competing with a zero percent capital gains 

rate in Hong Kong, Singapore, China, other parts of the world, and 

I do not think we can keep up with innovation and funding innovation at the same rate if we cannot keep attracting capital, and I 

think it is a very critical point. 

Chairman ALTMIRE. Mr. Dalton, do you have anything to add? 

Mr. DALTON. We are a lender. We have 90,000 public shareholders. So the conversation for our business is not relevant. 

However, I hear the panel’s point, and I think it is a good one. 

Private equity in general does put a lot of sweat equity and does, 

you know, take a lot of time. We have the benefit of seeing small 

companies get to a later stage and become middle market companies. So I think that it is a worthwhile discussion that ought to be 

had and not necessarily carving out specific groups. 

Chairman ALTMIRE. Thank you. 

We are going to have votes on the floor momentarily. So what we 

will do is just keep asking you questions until they call those votes 

and then we will adjourn. 

So I will turn it over to Ms. Fallin. 

Ms. FALLIN. Thank you, Mr. Chair. 

I was listening to some of your comments about who the investors are and how much money they have and, in particular, I heard 

one comment that the angel investors are not the Silicon Valley 

type investors, but they are people who make between 200 and 

400,000 a year and have some extra cash that they want to invest 

into venture capital. I think it was you, Ms. Mott, who said that, 

and that two-thirds of you investors now are strapped financially 

and many of you said they are sitting on the sidelines waiting to 

see what the rules are here in Washington and what the game is 

going to be. 

20 

And in light of all of that, when we look at some of the budget 

proposals that we are seeing right now in Congress, especially as 

it relates to people who make over 250,000 a year and some possible tax increases on those people, it seems to fall in that 200 to 

$400,000 range that you are talking about for the angel investors. 

So how would the proposals that we are seeing here with the administration and Congress on raising taxes for those making over 

250,000 affect the ability or maybe the availability of the angel investing funds from those people who are in that market range? 

and if I could ask all of you that. 

Ms. MOTT. We have already been impacted dramatically. When 

you see your net worth decline by 46 percent, you know, it impacts 

the marginal income you have to invest, but let me put it this way. 

Typically what you can invest if you are doing good, practical portfolio management, five to ten percent of your investable assets is 

what you risk in this asset class. So whether it is hedge funds or 

anything, because it is considered a very risky asset class, suddenly 

you see that go down, and that five to ten percent you had you no 

longer have. 

And so additional taxes are only going to impact that marginal 

piece that you can invest at risk because it really is at risk. Five 

of these companies out of 18 you will lose. They will go bankrupt. 

You will lose your money on. 

Ms. FALLIN. Okay. Mr. Walker. 

Mr. WALKER. Thank you. 

I agree. We are taking essentially that money that would be 

available for start-up companies away. There are other things we 

could do. For example, Mr. May’s testimony on a tax credit or incentive to those private investors who make targeted investments 

in emerging growth companies. So perhaps that is a catalyst to 

help offset this discussion. 

Ms. FALLIN. Yes, sir. I like that idea. 

Mr. May. 

Mr. MAY. As I say, it is almost impossible to get three of us, 

much less, you know, 380 at a conference or 12,000 to agree on any 

one public policy area, but the key thing we find is that these are 

people who are dedicated to doing this. They love to recycle their 

funds and their time and give back to the community. 

So one of our concerns is that there are so few people that are 

very wealthy that ever do this. I mean, it is just amazing that it 

is in the blood of a lot of people and you are right. We need to have 

as much capital in their hands as possible because they know what 

to do with it and they take the risk of multiple portfolio companies, 

but we have not ever sort of come up with any one magic bullet, 

and so that is why we try to, as you say, explore a variety whether 

it is sidecar funds, whether it is encouraging the later stage money 

that will pick up when we run out of money, whether it is low capital gains. I just think all of the things you are exploring are important, and yes, anything that would reduce our amount of capital is 

not necessarily good, but that does not mean that they will spend 

it on angel investing unless that level playing field is also worked 

on. 

Ms. FALLIN. Sir? 

21 

Mr. DALTON. For our company and the BDCs in general, our investors are really Mom and Pops who invest to get the dividends, 

fixed income. So they are participating in private equity. So I think 

what is important is that, you know, they have transparency and 

the confidence and the appropriate sort of rules so that they can 

understand what we are investing in and where the credit worthiness of our portfolios are, yet the accounting issues are making 

that transparency challenging for us. 

So I do think that it is less of an issue about sort of the taxes 

at that level, but people are investing in BDCs as a way to get access to private equity, but also wanting to sort of get that current 

income, and because of the lack of transparency, the entire BDC 

stocks have had a downward spiral, and not because of book value 

but because the concern about tripping covenants based upon assets that move every day, based upon hypothetical markets, 100 

percent of our portfolio. 

Yet we hold over 90 percent as an industry to maturity for the 

liabilities are fixed. So we have had to pull back our capital to protect against that when we should be lending our capital and have 

the desire to lend and available capital to the middle market and 

small companies. 

Ms. FALLIN. Okay. Mr. Neff. 

Mr. NEFF. Let me try to be very direct. There is no question that 

increased tax rates have an adverse impact on capital formation. 

I do not think I need to say anything more. Capital formation, 

whether it is institutional like I do or whether it is individual like 

some of these folks do, is very fragile and anything that increases 

uncertainty and anything that increases a feeling that you have 

less capital available to you has an adverse impact on the ability 

to pool that capital and deploy it effectively. 

Ms. HENDRICKSON. I agree with Mr. Neff. Most of our investors 

are institutional investors, university endowments, pension funds. 

So they are not directly impacted by that particular tax provision. 

They are mostly impacted, frankly, by the destruction in the equity 

markets and the fact that they have no liquidity at this point. 

Ms. FALLIN. Mr. Chairman, if I can ask one more question if possible, because I know we have got to go vote, one of the things I 

am concerned about is we are talking about tax policy as we are 

hearing various hearings about bonus money and callbacks and 

retroactively taxing and things like that. Do you ever get concerned, as I do, that some of our U.S. investment money, some of 

our corporate money may go out of the country if we start increasing capital, increasing capital gains tax, increasing corporate tax I 

should say, increasing capital gains tax, and changing the rules all 

the time; that they may just take it to one of those foreign countries you were talking about that had zero capital gains tax? 

Mr. DALTON. Yes. 

Ms. FALLIN. Okay. That is good. 

[Laughter.] 

Ms. MOTT. You know, some of my colleagues are already in 

China. They are in Australia on the West Coast. So, yes, they are 

already looking. 

Mr. WALKER. Yes, I think maybe another way to look at this 

again is we should be doing things that are catalysts for small 

22 

business creation regardless of the industry, and the more we can 

quit changing the rules and keep a level playing field and provide 

some incentives as a catalyst to create companies is the way to go. 

Mr. NEFF. I think what you have addressed has more of an impact on foreign capital flowing into the U.S. than it does on U.S. 

capital flowing outside of the U.S. because an individual U.S. citizen making an investment in Hong Kong will have U.S. taxes on 

that, not Hong Kong taxes on that. 

But the other way around is definitely true. If big pools of foreign 

capital, which traditionally do flow into this country, can get much 

lower tax rates outside of this country, they are not as likely to 

flow into this country. 

Ms. HENDRICKSON. I agree with Mr. Neff. That is the same issue 

for us. 

Ms. FALLIN. Thank you, Mr. Chairman. 

Chairman ALTMIRE. You are welcome. Thank you. 

I am going to try to squeeze one more in before they call this 

vote. It starts with a question that Ms. Mott brought up in her testimony, but again I’ll open it up for the whole panel. She commented on the role that government can play in helping to educate 

potential angels and grow angel networks, and I was wondering if, 

in your opinions, does adequate support framework exist for the industry to take up new resources and implement these new education programs. So we will start with Ms. Mott. 

Ms. MOTT. The framework exists in the Angel Capital Association and the Angel Capital Education Foundation, but I think additional funding is required to expand that reach. Like Mr. May, as 

a matter of fact, on Monday I will be in Austin, Texas teaching a 

course, an ACEF course, to angel investors for term sheets and due 

diligence, but I know we have very limited resources, and a lot of 

us do this out of the goodness of our heart, not because we get 

paid. 

But I can only imagine if the ACEF and the ACA could expand 

those courses to Web based courses. I think we could reach a greater number of people to learn about this asset class because it is 

very convoluted, and the more people who become comfortable with 

it, the more inclined they would be to engage in it. So, yes, support 

for the ACA and the ACF because I think the structure is already 

there in many ways and perhaps maybe Mr. May could elaborate 

on that. 

Mr. MAY. Well, I was just going to say whether it is through the 

trade association, the nonprofit, or whether it is through entrepreneurship centers at universities, the greatest upswelling over the 

last several years in a lot of the graduate programs have been in 

the entrepreneurship centers and programs all over the United 

States, and this is a subcomponent of that, is access to capital. We 

help train people to be entrepreneurs and then we do not adequately show them how to write a business plan, negotiate a term 

sheet, and understand valuation at this stage because it is less 

transparent than the later public companies. 

So we definitely would recommend that tax policy is great in 

some of these other areas, but anything that could be done to increase public awareness and education would be significant. 

23 

Mr. WALKER. A key point to that question is as we talk about the 

capital gap widening in the country and a lot of areas in the U.S. 

are smaller population centers, but we are still growing biotech 

companies and emerging growth companies, and anything we can 

do to help organize those early stage capital resources just helps 

the system start up more entrepreneurial based ventures. 

Chairman ALTMIRE. Perfect timing. 

[Laughter.] 

Chairman ALTMIRE. I ask unanimous consent that members will 

have five days to submit statements and supporting materials for 

the record. Without objection, so ordered. 

Thank you all very much for being here. This was very instructive. This is going to help the Committee as we move forward and 

address these issues. We really appreciate your time. 

Mr. MAY. Thank you, and come to a meeting any time you want. 

Chairman ALTMIRE. We will take you up on that. 

This hearing is now adjourned. 

[Whereupon, at 11:23 a.m., the Subcommittee meeting was adjourned.] 

24 


47799.001
25 


47799.002
26 


47799.003
27 


47799.004
28 


47799.005
29 


47799.006
30 


47799.007
31 


47799.008
32 


47799.009
33 


47799.010
34 


47799.011
35 


47799.012
36 


47799.013
37 


47799.014
38 


47799.015
39 


47799.016
40 


47799.017
41 


47799.018
42 


47799.019
43 


47799.020
44 


47799.021
45 


47799.022
46 


47799.023
47 


47799.024
48 


47799.025
49 


47799.026
50 


47799.027
51 


47799.028
52 


47799.029
53 


47799.030
54 


47799.031
55 


47799.032
56 


47799.033
57 


47799.034
58 


47799.035
59 


47799.036
60 


47799.037
61 


47799.038
62 


47799.039
63 


47799.040
64 


47799.041
65 


47799.042
66 


47799.043
67 


47799.044
68 


47799.045
69 


47799.046
70 


47799.047
71 


47799.048
72 


47799.049
73 


47799.050
74 


47799.051
75 

Æ