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SMALL BUSINESS STRATEGIES | FINANCE

Instead of a Raise, Ask Boss for a Lift

Your employer may be willing to invest seed money--especially if your start-up can help the firm.

October 14, 1998|JUAN HOVEY | SPECIAL TO THE TIMES

Want to start your own business? Need money? A good source may be closer than you think: your employer. If you work for a profitable and growing business, you may be able to interest it in financing your idea with seed capital.

The plan works particularly well if you can present your start-up company as a strategic extension of your employer's business. And it gives you two big advantages in the difficult search for such capital:

* You're a known quantity, so you don't have to sell your employer-investor on your basic business smarts.

* You get a patient investor--unlike those venture capitalists who push hard for fast exits via public stock offerings.

John Reese keyed on these factors in founding his Los Angeles start-up, Interactive Search Inc., in 1994. The company, with offices near Los Angeles International Airport, uses sophisticated data extraction software to help big employers sift through the tens of thousands of resumes they get from job seekers every year. I-Search now employs about 100 people and generates revenue of "several million," Reese says.

Reese took I-Search through three quick financing phases. After writing a business plan, he rounded up $500,000 in seed money from two private investors. Six months later, in mid-1995, he went to his former employer, TRW Inc., as a strategic partner and two more private investors to raise nearly $1 million--not a lot of money as start-ups go. He took I-Search through a third round later that same year, raising $3 million from yet another strategic partner, Softbank Inc., which owns the computer magazine publisher Ziff-Davis. Softbank saw I-Search as a means of expanding its services in the high-tech industry.

Reese's relationship with TRW was key to his success for two reasons: His bosses knew his expertise and management skills firsthand, and he presented I-Search as a strategic extension of one of TRW's core businesses, management of credit data.

In fact, Reese got the idea for his new company while working at TRW, and he uses technology developed there to run it, under license.

Reese worked for TRW from 1986 to 1994, ending up as president of a subsidiary, TRW Financial Systems Inc., which used image-processing technology to help companies such as American Express handle remittances from cardholders. The technology scanned bills and checks to capture and compare key information on each, update cardholder accounts and deposit the checks--a paperwork nightmare if not mechanized.

Reese knew of another paperwork nightmare--the piles of resumes clogging the offices of TRW and other big employers such as Knight Ridder, Texaco, Netscape Communications, AlliedSignal and BellSouth, all of which are now his customers. Employers expend vast treasures trying to find good people, and paper resumes, like paper bills and checks from credit cardholders, clog the process.

Reese knew that many resumes go unread simply because the employer has no way to sift through them, and he thought of a way to adapt TRW's image-processing technology to speed the process.

Reese's technology captures the essential information on a resume--name, address, expertise, etc.--and deposits it in a huge database through which employers can sift using search engines akin to those that enable people to navigate the Web. The technology greatly reduces the time it takes to identify likely candidates and turns a liability--mountains of resumes--into an asset. I-Search counts about 500,000 resumes in its database, and the number, Reese says, grows 15% per month.

Reese got TRW to participate in his second-round capital financing because the company saw his idea as an extension of its core business.

"We weren't a start-up run by a bunch of brash young guys from the assembly line," Reese says. "I had been running a significant piece of TRW, and I had credibility. TRW invested in a management team and an idea."

His advice to others who might tap an employer for seed capital:

* Don't burn your bridges. You can't go back to an employer who claps as you leave.

* Understand your old company's strengths and weaknesses--and look for its future needs.

* Line up support for your idea with a solid network of colleagues in your old company.

* Be patient.

"The negotiations with TRW took almost a year," Reese says. "Big companies don't move as swiftly as individual investors. TRW saw the strategic fit, and it wanted to participate in the growth of the Internet. But it took time."

The payoff, Reese says, is that TRW and Softbank understand his business and have the wherewithal to wait for its success.

"A strategic investor is patient capital," Reese says. "So we can do the right things for the business--not the right thing for the short-term venture-capitalist investor."

Lawyer Richard Hansen, a partner in the Torrance law firm Petillon & Hansen, who helped Reese negotiate his deals with TRW and Softbank, agrees.

"This kind of alliance gives you an investor who understands and trusts you already--and who understands the business opportunity," Hansen says. "So you tend to get a contented investor."

In addition, the strategy allows an employer to explore a new line of business without risking its reputation if the venture goes bad, Hansen says.

The investor acts quietly, and if the new business catches on, the investor can either buy the new business or form a more overt joint venture.

The catch is that most people don't leave jobs on terms that allow them to talk to their employer about investing money in a new business. In Reese's case, it worked.

Juan Hovey columns on small-business financing and insurance appear regularly in Wednesday's Business Section. He can be reached at (805) 492-7909 or via e-mail at jhovey@gte.net. How to get financing will be a topic of The Times' Small Business Strategies Conference this weekend at the Los Angeles Convention Center.

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