Vested for Growth loan fund gives firms funds, guidance

For SyAM Software, it meant a $750,000 loan to help the Nashua start-up company take the next step without giving it away to venture capitalists.

For Bortech Corp., a small machine company in Keene, it meant a $500,000 loan, a nearly 40 percent growth rate and picnic barbecues in the driveway.

For Design Mentor, a Pelham engineering consultant firm, it meant a $250,000 loan and a steady flow of work that tripled the company’s sales in a single year.

These are the first three companies to participate in Vested for Growth, a business loan program launched by the New Hampshire Community Loan Fund that takes a risk on businesses – particularly manufacturing firms – that other financial sources take a pass on.

In return for its support, VfG seeks a good return, partly based on a percentage of sales that result from the deal and partly based on higher employee participation, as well as a steady, sustainable growing company. If all goes as planned, VfG hopes to be able to use the proceeds from its loans to expand the program, making it self-sustaining.

VfG doesn’t offer cheap interest rates. In exchange for taking a higher risk, it often charges more for a loan than a bank would get. And, unlike traditional venture capitalists, it doesn’t want a piece of the company for taking that risk.

What VfG does expect are such reforms as open books, employee ownership and other forms of employee participation. The reforms are not mandated — though they do earn a discount in the loan rate – but they are encouraged by a network of CEOs who assert that such practices help grow and sustain a company.

“It is based on persuasion, not power,” said John Hamilton, VfG’s executive director.

VfG was launched by the loan fund with the go-ahead to lend $3 million, half from loan fund reserves and another half raised through donations specifically for the project.

Exceeding expectations

The first loan was handed out to Bortech in November 2002, and since then VfG has been building a track record.

Bortech is a 15-year-old firm that holds the patent on a 25-pound borewelder, a tool that can easily weld and repair worn holes in many machines and machine parts, extending their life. The company was about to be sold off to an Oregon firm when VfG gave Leo White – who had worked for companies with similar values about employee participation – enough capital to finance the purchase.

Since then, Bortech has taken off, exceeding expectations of a 20 percent growth rate by climbing to 39 percent last year. VfG gets a share of those sales – what it calls royalties — which accelerates the payback period and cuts the loan cost.

But the relationship doesn’t end there. To further cut the cost of the loan – and because he believes that it will help the company — White increasingly is moving to employee-oriented policies.

For one, he participates in the Learning Partnership, in which CEOs host monthly meetings where they share ideas on everything from building a company around people – as opposed to a set of skills – and using a psychologist when hiring. (The partnership is holding a workshop May 25 for CEOs and their employees on business culture. For more information, call VfG at 224-6669, ext. 239.)

Bortech employees – there are now 10 – wrote their employee handbook and developed their profit-sharing plan. In addition, they participate in monthly strategic planning meetings, where they evaluate whether the company is moving in the right direction.

And it instituted weekly quality control meetings where – among other things – they implement employee-generated ideas on how to improve the work environment.

Some of the ideas generated at the weekly meetings coincide with the company’s drive for greater efficiency. For instance, White said, the company rearranged where tools are stored so workers don’t have to walk as far to get them. And they instituted a voice mail system so they would be better able to handle calls.

Other workplace changes, however, seem to benefit the workers, such as setting up a picnic table, a gas grill and a larger refrigerator for use at lunch. That doesn’t just boost moral, but it means that workers are less likely to drive someplace to eat and are more likely to talk and communicate more with other employees.

Allowing employees to work two days with pay as community volunteers not only earns loyalty, says White, but creates goodwill that might benefit the company in the long run.

Worker involvement

The Bortech loan is an example of sub-bank financing – money given to a long-running machine company that needed to fill a gap that banks or development companies wouldn’t finance.

Another one is Merrimack Software Associates, a small Tamworth company that supplies software to community newspapers and is seeking to expand from DOS-based to Windows-based software in order to nearly double it size to 11 employees.

Merrimack Software received $150,000 in financing from the Berlin Economic Development Council (BEDCO) and the Mt. Washington Valley Economic Company, but neither were willing to risk another $50,000 in the venture.

VfG did take the risk, in a deal that closed on April 6.

At the opposite end of the spectrum is SyAM, a Nashua firm that started up in 2002, which builds software that helps IT managers as well as computer sellers monitor hardware for malfunctions.

SyAM CEO Nick Thickins was burned by stock options in a previous company that never ended up going public, and he didn’t want to start up a firm only to turn it over to venture capitalists.

“We didn’t want them to bring in their own team to run the show,” he said.

Thickins said he wanted to make sure his employees got a piece of the company – including the most junior members, those just getting out of college, who get at least 1 percent piece. Seven members of the board of directors also are “substantial shareholders.”

The idea, said Thickins, is that everybody in the company is thinking as an owner, not just as an employee.

“It’s not just learning a good code,” he said. “It’s learning how the general business functions. We are brain-dumping into these people. The more we can empower them, the more productive they are.”

Such a philosophy caught the attention of Hamilton. Hamilton didn’t structure worker participation loans into the deal – it would be premature to do that for a start up, he said – but in order to lower loan costs, VfG did take a small amount of equity in the company.

“SyAM was more risky than Bortech, so by definition it was more expensive,” said Hamilton.

It isn’t just a loan, but resources that Hamilton and his group of CEOs bring to the table.

With a board focused on economics and financing, it is good to have a “sounding board” of executives to concentrate on people, he said.

“When you are working 14 hours a day you don’t take the time out to look at these issues,” said Thickins. “This is a fresh perspective. We don’t have human resource advisers. This helps fill that void.”

Biggest advantage

Doug Vincent, CEO of Design Mentor — a systems engineering firm that employees six people, many of whom used to work for inventor and entrepreneur Dean Kamen — was already a firm believer in worker participation down to an open books policy.

To Vincent, the biggest advantage of VfG thus far has been a shift in the company’s focus, from one that concentrates solely on design to one that goes after business more aggressively.

“We thought that if we were bright engineers, they would show up. We had no concept of a pipeline,” Vincent said.

Before the company’s involvement with VfG, Design Mentor had gone from “project to project,” usually working for one or two customers at a time. Now the firm markets itself, not merely as innovators, but as “business-focused engineers.”

“In the last three years (before the VfG investment), we had three customers. Since then we’ve added 25,” he said. His employees are so busy that the firm contracts out to handle the crunch times. The result is sales pushing $1 million — more than triple previous revenues.

“We wouldn’t be here today if it were not for them,” said Vincent. “We were dang lucky to have them here.”