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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/senate
(II)

COMMITTEE ON SMALL BUSINESS AND ENTREPRENEURSHIP

ONE HUNDRED SEVENTH CONGRESS

JOHN F. KERRY, Massachusetts, Chairman

CARL LEVIN, Michigan

TOM HARKIN, Iowa

JOSEPH I. LIEBERMAN, Connecticut

PAUL D. WELLSTONE, Minnesota

MAX CLELAND, Georgia

MARY LANDRIEU, Louisiana

JOHN EDWARDS, North Carolina

MARIA CANTWELL, Washington

JEAN CARNAHAN, Missouri

CHRISTOPHER S. BOND, Missouri

CONRAD BURNS, Montana

ROBERT F. BENNETT, Utah

OLYMPIA J. SNOWE, Maine

MICHAEL ENZI, Wyoming

PETER G. FITZGERALD, Illinois

MIKE CRAPO, Idaho

GEORGE ALLEN, Virginia

JOHN ENSIGN, Nevada

PATRICIA R. FORBES, Democratic Staff Director and Chief Counsel

EMILIA DISANTO, Republican Staff Director

PAUL H. COOKSEY, Republican Chief Counsel
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CONTENTS

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

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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 Entrepre-
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neurship 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 armslength 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.
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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
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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 Bostonbased 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
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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:]
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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 startup 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
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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
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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:]
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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.
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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 freeflowing commerce and activity.

Chairman KERRY. So, what you are saying is if you are a multinational 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 ven-
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tures 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
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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.
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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
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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
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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
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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 setsides, 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.
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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
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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
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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
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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?
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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
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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 reinvest 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
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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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