COMMENTARY | COLUMNISTS | PHIL BAKER

Help for San Diego startups

Five years ago when Steve Iverson was looking for funding for his startup, Streamload (streamload.com), he had an idea, but no funding. With the help of the EmTek Fund, part of the city of San Diego's Community Economic Development Department, he was able to raise $650,000 -- $400,000 from a private angel investor and $250,000 from EmTek. The fact that EmTek agreed to invest in tandem was an incentive for the private investment.

Streamload's total investment from all sources totals $825,000 to date. Today the company is profitable, employs 11 people and has over 10,000 paying customers, mostly home computer users. Streamload sells storage and bandwidth, essentially space and access to files. They focus on large media files including audio, video, DVD movies and even files from TiVo users who want to save their recordings. Users that store their music and video files on Streamload are able to access them from any remote location with Internet access. Others use Streamload to store large files for others to access, rather than sending them by e-mail.

Streamload is one example of the 13 investments EmTek has made since its inception in 1996. A total of $2.2 million has been invested to date with individual investments ranging from $100,000 to $250,000. These have leveraged an additional $15 million of investments and have created 131 jobs.

EmTek has proven to be one of San Diego's valuable resources for helping small entrepreneurial companies, particularly those located in economic development target areas. EmTek's revolving loan fund provides funding at a crucial stage in a company's life, usually between its initial seed investment and a major VC investment. These companies often have difficulty obtaining conventional loans because they lack credit history or collateral. It's also difficult to get a small VC loan because the cost of the VC's due diligence makes it hard to justify a small investment. EmTek's loans are used for working capital with terms up to five years at below-market interest rates. They look for an internal rate of return of 25 percent.

EmTek has a staff of three finance officers with commercial lending and accounting backgrounds and is managed by Mark Sullivan, the business finance manager in the Community and Economic Development Department. A finance professional with a background in investment banking and economic development, Mark has worked for the city for 14 years and was instrumental in creating EmTek.

EmTek has established two funds so far. One was created in 1995, funded by a federal defense conversion grant, to help commercialize defense technologies. The second was created in 2000, with capital from private financial institutions. This latter fund focuses on helping early stage companies located in areas where the creation of new jobs would benefit low-income communities, as well as helping minorities and women.

Typically, EmTek makes loans, often participating alongside angels and strategic investors, ranging from 20 percent to 50 percent of a $100,000 to $1.25 million early stage financing round. Its initial funding came from the city, the county, the federal Economic Development Administration, the North American Development Bank and a consortium of area banks. EmTek's capitalization currently stands at approximately $2.5 million.

Over the life of the funds, only $160,000 has been lost, amazing in these economic times. The returns on the investments have been sufficient to pay for all of its operation and follow-on loans. The city's general fund is not touched. This type of publicly administered fund is quite unique, with only New York City having something similar still in operation.

The profile of a company that receives an EmTek loan is an early stage growth company located in San Diego County. It usually is ramping a product with some market traction and also raising some matching outside equity, often from industry-savvy private investors. The company's industry has high potential and can demonstrate a strong recent growth trend. The typical loan is about $200,000, paid out in increments as defined milestones are met, with initial payments being interest only. Warrants are provided which provide the upside to the fund, and the loan is usually backed by personal guarantees from the principals. The city is never an equity owner of a borrower company.

EmTek's first loan in 1996 went to Vectron (vectroninc.com), a company that designs and manufactures automated optical inspection equipment for populated circuit boards. Founded by a laid-off Hispanic defense engineer, Joe Vilella, Vectron operated out of his Chula Vista home with only one other employee. EmTek's investment of $125,000 was used to build their first prototype. The Tech Coast Angels subsequently invested an additional $500,000 to further product design and development. After its first loan was repaid, EmTek provided a second for $225,000 to finance Vectron's first purchase order from Qualcomm (Nasdaq: QCOM). The company went on to successfully commercialize its product and now has customers in the United States and China. It has 15 employees and another 20 as outside contractors and consultants. Vectron has a valuation of $45 million and is close to breakeven. The company has recently opened an R&D center in Puerto Rico and is relocating to Sixth Avenue, in the ballpark redevelopment district downtown. Vilella, now CEO and president, told me, "The EmTek investment was fundamental to where the company is today."

With government officials and agencies often receiving criticism for creating an unfavorable business climate in California, EmTek comes through as the antithesis. It has demonstrated what a proactive and forward-thinking economic development agency can do to stimulate growth and make San Diego not only one of the best places to live, but one of the best places to start a business.


Baker is San Diego's Ernst & Young Consumer Products Entrepreneur of the Year in 2000 for successfully bringing to market Think Outside's folding keyboard for the Palm and other PDAs. He also serves as a volunteer on EmTek's advisory board. Reach him at phil.baker@sddt.com.

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