Question: What do Atlantic Research, Spa Lady Corp., Pandick Inc., The Wholesale Club, International Signal & Control Group, Howard Sanders Communication Corp. and Southern Systems have in common?

Answer: They all are successful companies that drew financial support in their early growth years from Allied Capital Corp. of Washington, a 26-year-old venture capital firm. Allied puts money into young, fast-growing companies, with the goal of seeking high returns on their investments. Allied currently has 65 companies in its $54.8 million investment portfolio.

When it comes to investing, there are lots of ways to try to make money. One of the trickiest is to be a venture capitalist, supplying cash to people who need funds to open a business or to keep a going business going.

Many people are venture capitalists and don't know it. If you lend your brother-in-law $5,000 to help him open a hardware store, that act of faith -- or charity -- makes you a venture capitalist, even if you know that free hardware supplies may be the only repayment you're likely to see.

Professional venture capitalists, of course, do it differently. One of Washington's most experienced investors is David Gladstone, president of Allied Capital. Publicly owned, Allied's stock trades over-the-counter and has lingered in the $18-to-$22 range for two years.

During the 11 years that Gladstone has been Allied's top investment officer, he has looked at thousands of proposals submitted by entrepreneurs. Proposals come in at the rate of 10 or 15 a day, but only one in 10 is looked at seriously. Of those given serious consideration, only one in 100 wins funding from Allied, Gladstone said.

When making his investment decisions, Gladstone, a 43-year-old Harvard MBA, follows a reasonably strict set of rules. In fact, he has written a rule book. Two years ago, Gladstone authored the 400-page "Venture Capital Handbook," subtitled "An Entrepreneur's Guide to Obtaining Capital to Start a Business, Buy a Business or Expand a Business."

The decision on whether to invest in a company, Gladstone said, starts with that firm's finances. The numbers have to be good. Gladstone examines a prospect's financial strengths and weaknesses in minute detail. "We all live and die by the numbers," he said.

Gladstone looks most closely at profits. What he wants to see is a 30 percent annual return on investment. If it's less than that, he is not likely to be interested. There are lots of business ideas that will make a modest amount of money, but that's not good enough, he said. "We, of course, are in the business of picking winners, and, by winners, I don't mean average deals. I mean companies that make a lot of money," Gladstone said.

The next decision gate is the company's management. "It has to be a winner," Gladstone said. He tries to analyze the members of the management team for their personal and business achievements, their experience and, especially, their honesty.

"I've heard people say, 'I don't like to invest in somebody unless he has a little larceny in his heart.' To us, it's the worst sign. If they've got a little larceny, it may mean they've got a lot."

Gladstone looks, too, at the uniqueness of the business idea, the market for the product or service, and where it stands in the larger scheme of things. Some venture capitalists, he observed, look for revolutionary businesses, such as firms engaged in gene-splicing. He prefers evolutionary businesses such as Pandick Inc., the financial printer, or Spa Lady, an exercise spa for women that emphasizes aerobic dancing. Both companies were able to develop strong market niches for their services.

Considering the number of disasters in the physical fitness industry, Gladstone said, the idea of investing in Spa Lady gave him some pause at first. But he says he found the company to be market-driven, keen to cater to its members and careful about its managers. Best of all, he said, Spa Lady makes a lot of money. Recent figures showed a 10 percent profit on sales of $17 million -- or $1.7 million. Allied lent Spa Lady $700,000 and has an option to own 30 percent of Spa Lady. The option, which cost $28,700, is estimated to be worth $1.25 million.

Finally, in deciding whether to invest in a firm, Gladstone says, he must consider whether, at some point, Allied can easily pull out of the company. "We need to get out of a deal. We need to cash in," he said. Leaving a company allows Allied to raise money so it can pay its dividends. Over the years, Allied has had its losers as well as its winners, but it has guessed right often enough to boost its annual net realized income over the past 10 years from $495,000 to $4.2 million. Hewing to its own yardstick for investments, Allied Capital's net realized income has grown at an average annual rate of 30 percent.

One out of every 20 deals, Gladstone said, turns out to be a loser. Another three or four are draws -- they don't make much but they don't lose much, either. The rest do well. Gladstone generally lets the high-fliers go by. He admits to turning down Federal Express four times because the company, now hugely successful, looked too uncertain. But then he also refused John DeLorean on two occasions. "So we turn down winners," he laughed, "but we also turn down losers."

Allied likes to structure its investments as convertible debt securities or to make loans with options to acquire stock. Its normal ownership of a company is in the 15 to 20 percent range. Allied's goal is to sell its position in five to eight years, and its investments range from $100,000 to $750,000. Allied prefers to let an entrepreneur run his own show but will get involved in management if a company gets in financial trouble.

To protect its investments, Allied generally keeps some tight strings on the direction of management. For instance, if Allied holds convertible debentures (bonds) in the company, and the company defaults on the performance promises contained in the debenture documents, Allied could foreclose on the business, take it over and run it.

Gladstone, who has met a lot of business operators, said that one of the greatest entrepreneurs he has ever met is Howard Sanders, who operates WYCB-AM, a local gospel radio station. Allied lent Sanders' company $400,000 and could exercise warrants costing about $29,000 that would be worth $248,000. That would give Allied 28 percent of the company. Gladstone and Allied liked Sanders' operation of the station so well they helped finance two more stations in Richmond and Baltimore. "He's now building those up. When he builds those up, we'll buy two or three more."

To expand its operations, Allied recently raised $40 million for its new Allied Venture Partnership. Only $7 million was raised in the Washington area, and Gladstone stirred up the Washington business community recently when he criticized their unwillingness to invest in venture capital funds.

The new partnership will pave the way for Allied to do about 60 more venture capital deals. Gladstone is not sure where they will come from, but it seems certain he will do it by the book -- the Gladstone book.