Will investor jeopardize company's 'small' status?

Sept. 1, 2003
A big company wants to make a small investment in my company. They will put someone on our board and also get an option to acquire the company. Will I still qualify for SBIR?
1304qa Chang New

Q. A big company wants to make a small investment in my company. They will put someone on our board and also get an option to acquire the company. Will I still qualify for SBIR?

A. I have an authoritative answer for you, quoting Maurice Swinton of the SBA (Small Business Administration):

"The company will be ineligible for SBIR if the big company has the power to control the small business. In the SBIR and all other SBA programs, we classify a small business as one that also has the power to control its own destiny (which includes hiring, firing, expanding, etc.). . . A small business should not only have 500 or fewer employees, it must be for profit, have its principal office located in the U.S., be at least 51% owned by U.S. individuals or a permanent resident alien who controls and operates it, and be independently owned. Control means exercising the power to make policy decisions. Operate means being actively involved in the day-to-day decisions. . . . Indeed 51% ownership does constitute owning a majority of the stock, but the underlying question is who actually controls the firm. Large companies are taking equity positions in these firms that may not include large chunks of stock, but their equity position includes control of the firm, therefore making the firm in actuality a wholly owned subsidiary of a large company."

The trend in our industry is to acquire for revenues. More and more established companies want to make investments in smaller companies to get a foot in the door for future acquisitions. You have just pointed out one of the many drawbacks of this for start-up companies. If you have any questions relating to SBIR, contact Swinton at [email protected].

Q. I have now worked for two failed telecom start-up companies. What kind of skills do I need to start my own company right?

A. Unlike some people who have come to Incubic to raise money with the attitude "if some idiot did it, why can't I," you are asking the right question. The reality is a lot of the companies started during the "bubble" hired unqualified executives with only good-looking resumes.

People can be successful for different reasons. Some succeed because they are the best in an area of specialty, while others are able to run a tight ship to compete on prices. But there are some common traits among all successful entrepreneurs. First, they are very good at what they do both technically and as a businessperson. That usually means they have been successful working for companies and over time become expert in an area and are able to develop insights into the nuances of an industry. They are also very single-minded and driven to accomplish the goals they set for themselves. The ability to focus is important because resources are limited and they are likely to receive more investment if they can demonstrate some success. The other important resource is people. It takes self-confidence to recognize and acknowledge one's own strengths and weaknesses to identify the right people to complement your skills and also be able to convince them to buy into the company vision. That requires communication skills, which include active listening and presenting information based on the interests and viewpoints of the listener. This list of skills can go on, like decision making, problem solving, negotiation, time management, and so on.

A follow-up question is: how does one acquire these skills? You can only hone these skills over time by practice. Since running a company has many similarities to managing a big project, there is no better way to learn than by the experience you gain working for a well-managed company. Ideally you want to have a mentor and you want to take on increasingly larger project responsibilities. That will provide you an opportunity to build a network of contacts as resources in reserve as well.

About the Author

Milton Chang

MILTON CHANG of Incubic Management was president of Newport and New Focus. He is currently director of mBio Diagnostics and Aurrion; a trustee of Caltech; a member of the SEC Advisory Committee on Small and Emerging Companies; and serves on advisory boards and mentors entrepreneurs. Chang is a Fellow of IEEE, OSA, and LIA. Direct your business, management, and career questions to him at [email protected], and check out his book Toward Entrepreneurship at www.miltonchang.com.

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