About 15 years ago, a group of New York entrepreneurs approached Allied Capital Corp.
They wanted to establish a company that would specialize in financial printing--turning out those thick documents that companies must file with the Securities and Exchange Commission as well as annual reports and official corporate statements.
Allied--a Washington-based company that specializes in making seed-money investments in beginning companies as well as making loans to small businesses--put $200,000 into the new venture, Pandick Press.
Today Pandick has grown into one of the most important financial printers in the business. In the process, it has enriched Allied Capital many times over. Off that original investment of $200,000, Allied President George Williams said, Allied shareowners have earned nearly $6 million.
Not all of these seed-money--called venture capital--investments turn out so well. There are many more failures than successes in the venture-capital game. Even when there is a success, the wait can be long between the initial investment and the time when the company itself goes public or is purchased by another company--the time when the venture capitalist realizes gains.
But Allied, one of about a dozen publicly owned small business investment companies, has a 24-year history of profitability and growth. Begun in 1959, with an original private investment of about $160,000, the company "went public" (sold stock in itself to other investors) in 1960 to raise another $1 million. Today, Williams said, Allied owns assets worth about $44 million.
Allied, however, did not take the pure venture-capital route. About half the company's operations are generally less risky loans--which produce income while the company waits for its long shots to come in.
Greater Washington Investors Inc.--like Allied, founded almost immediately after Congress passed the Small Business Investment Act in 1958--has chosen the pure venture-capital route. Greater Washington, also a publicly owned small business investment company, has had a rockier history than Allied. It nearly collapsed.
But this year, for the first time in more than a decade, Greater Washington paid shareholders a dividend and appears to be back on a growth path.
Although Allied Capital always has hedged its investments to produce current income and capital gains, Greater Washington makes money only from the appreciation of investments it makes in beginning companies. If it receives any income--sometimes the companies it invests in pay dividends--it is incidental, according to President Don Christensen. When the investments don't pay off, Greater Washington suffers severely.
In 1960, Greater Washington went public. It raised $4.5 million that it said it would invest in fledgling high-technology companies. Christensen said that Greater Washington and Allied were among 30 small business investment companies that went public in the two years after Congress passed the investment act designed to make it easier for smaller companies to raise the capital they needed.
At their peak in the early 1960s, Christensen said, there were about 1,000 small business investment companies, publicly owned and privately owned, funneling seed money and loans to small businesses. Their numbers have shriveled, Christensen said. It was harder to invest in small businesses than many believed.
Christensen should know. Greater Washington has been on top. And on the bottom.
By 1969, the venture-capital operation had parlayed the initial $4.5 million investment into assets worth about $20 million. The stock market was as high as it would get for more than a decade. Technology stocks were the darlings of Wall Street. Then disaster struck Greater Washington Investors.
Christensen said the company made two major mistakes. He invested in real estate--a field he knew little about--and Greater Washington held on to some of the high-flying stocks too long.
In the early 1970s, real estate was the most chic investment on Wall Street. Property values appreciated at an unheard of rate. Many investors believed the dollars to be made in real estate were boundless. In 1972, Greater Washington Investors could not resist the attraction. Greater Washington invested $5 million in a 2,000-acre Mississippi Gulf Coast development called Singing River Properties.
"That became our undoing," Christensen said. "It was an absolutely unmitigated disaster." The property was demolished by Hurricane Camille. Greater Washington unloaded the property in 1978 at a total loss.
At the same time that the real estate investment was sinking literally, the technology investments that looked so good in 1969 and 1970 were sinking figuratively. "We didn't realize how overpriced they were," Christensen said. "We weren't smart enough to sell them in 1969."
By 1977, Christensen said, the value of the assets the company owned had shrunk to less than $1 million. The company already was three years into what it called a "survival mode." It had hired analysts and secretaries and rented large quarters. Everyone but Christensen and a secretary were let go. Greater Washington Investors moved to a small office.
But by 1978, after Singing River Properties was unloaded, things began to look up again. Some of the investments made in the late 1960s began to perk up.
Then last year, Greater Washington hit its own version of Allied's Pandick Press.
In 1969, Greater Washington made a $250,000 investment in a Phoenix computer software company called Capex Corp. Last August, 13 years after Greater Washington's seed money was sown, Capex was purchased by Computer Associates International Inc. Greater Washington received nearly 312,000 shares of Computer Associates stock in return for its stake in Capex. In November, it sold 135,000 of those shares for about $4.5 million. Stock that cost it 81 cents a share in 1969 was worth $35.50 last November. Greater Washington sold another 20,000 shares this year at an average price of $42.50, Christensen said.
"A quarter-million-dollar investment generated over $5 million in capital gains," he said, while the shares the company still owns are worth $4.5 million on the books. It was a big killing. "But it takes a hell of a long time," Christensen noted.
Both Allied and Greater Washington spend much of their time lending advice to the companies in which they invest. Entrepreneurs often know their particular field quite well, but are unaware of many of the problems faced by all small businesses that both Christensen and Allied's Williams have seen many times before.
But even with the best advice and the best vision, companies can be too far ahead of their time. Christensen recounts the story of ISC Corp., an Ann Arbor, Mich., company that began to develop word processors in 1970. Today, the word processor is more common than a typewriter in many offices, but in 1970 there was no market for them.
"The company had to promote a market. It had neither the resources nor the technology to do it. Eight years later word processors were a big business, but by then ISC had folded," Christensen said.
"We're dealing in high risks. There are a lot of valid projects by a lot of smart guys that just don't work out." When they don't work out, neither does the investment.
But with the Capex investment working out now, Christensen is optimistic. He has added a full-time professional and a part-time secretary and moved to larger quarters--although he left Washington for the Barlow Building in Chevy Chase. D.C. law does not permit companies to offset current tax liabilities by "carrying forward" losses of previous years. Maryland does.
Greater Washington has $2.3 million in loss carryforwards to offset taxes due on its recent profits. "We're saving $250,000 in taxes," as a result of the move, he said.
Allied Capital Corp., ensconced in the Cafritz Building at 16th and I streets NW, has no need for loss carryforwards. It also has resisted any temptation to move out of its investment specialty, mainly small manufacturing companies.
"We stick to things we understand: printing companies, radio and television stations, and the like. It's not as sexy as high technology," Allied President Williams said. "Pandick Press may not have the appeal of Apple Computer. But I always say, 'Shoemaker, stick with your last.' "
Six years ago, Allied changed its corporate structure. Allied itself became a holding company--one designed to own other companies. It owns one company, Allied Investments, that is primarily a small business venture-capital firm like Greater Washington.
Allied Investments, however, primarily makes loans to small businesspersons who are franchisees of companies such as Dunkin' Donuts and Midas Muffler. These loans are 90 percent guaranteed by the Small Business Administration. In this business, Allied competes mainly with banks who also make SBA-guaranteed loans.
Williams said Allied is considering starting up a pure venture-capital mutual fund to which Allied would be the adviser. He said that in the past two months, Allied Investments put together two seed-money packages worth about $5 million in total. Since the company will not make a venture-capital investment in excess of $500,000--because of the high-risk nature of the business--Allied "gave away" to other venture capitalists and small business investment companies about $3 million to $4 million in business, Williams said.
If Allied managed a venture-capital fund, it could keep some of that business in-house, but would not risk the capital of Allied itself.