Want to Start a Business? Forget It.

Five or ten years ago quite a few men like Gerald Pierce might have found a loan to help start their own businesses. The market was right for a man with a good idea to go into business for himself. If it was an electronic gadget that looked promising, chances are a venture capital company would put up the money to back it. If things went right, within a few years the new company could sell stock publicly, giving the venture capital supplier a chance to sell out, take the proceeds, and help put another ambitious entrepreneur into business. Those days are long gone. Today the heads of Dallas’ largest venture capital companies say it simply isn’t worth the risk.

Gerald Pierce is an exception to this rule. Granted there’s nothing spectacular about suddenly owning your own grocery store. It’s hardly a big time operation. Gerald Pierce’s face isn’t likely to ever grace the pages of Fortune, but Pierce’s case is proof that at least in some areas there’s still a chance for the little guy to buy his own business.

Gerald Pierce: “I used to have to please the big shots at A&P.”



Pierce had worked for A&P since he was 18 years old, eventually rising to store manager at A&P’s Casa View store. When A&P decided two years ago to close all of its Dallas stores, Gerald Pierce might simply have found himself out of a job. Instead, at 40 he and a partner became owners of the store, and are doing quite well.

“Right now all I’ve got to worry about,” Pierce says, “is keeping my customers happy. Before I also had to worry about keeping the big shots at A&P happy. Since I bought the store nearly two years ago,” Pierce continues, “my sales have doubled.”

Pierce’s good fortune came through a venture capital company owned by Affiliated Foods of Dallas. Affiliated Foods is an unusual operation itself. Put simply, it is a cooperative owned collectively by 650 individual store owners like Pierce. Each of the 650 storeowners is an independent grocer operating under a different name. They buv food collectively, through Affiliated, which has a huge warehouse off Carpenter Freeway. Thus they enjoy the advantages of individually owning and operating their own stores, but still collectively have the buying clout to compete with the big chains, such as Safeway.

“About 10 years ago we realized that our storeowners couldn’t keep up with Safeway’s expansion in Dallas,” says Affiliated’s John Myrick.

“So we chartered a small business investment company to provide the funds. About two-thirds of our members bought stock in Capital Marketing Corporation,” Myrick says, “and then we borrowed two dollars of Small Business Administration money for each dollar our members put up.” Capital Marketing has lent $19 million to its independent grocers during the last seven years, earning $800,000.

“Our investors have been making about nine percent annually on their stock investment,” Myrick explains, “but that’s not the main reason they bought the stock. Most of them bought it because they wanted to see the independent have a chance to compete with the Safeways, Krogers and A&Ps.”

Two years ago when Affiliated Foods general manager Nat Gibbs heard that A&P was going to close its Texas stores, he hurried to Washington to secure funds for buying some of the stores. Affiliated Foods put $1.3 million into Capital Marketing and the federal government lent $2.6 million. Gibbs hastily called meetings of A&P store managers and current Affiliated storeowners, to ask who wanted to buy an A&P store. Gibbs gave potential investors a list of the available, sites and 24 hours to check them out. The investors bought 37 A&P stores. Among the investors was Pierce, who borrowed his purchase money from Capital Marketing Corporation and quickly went into business for himself as Casa View Foods, which is now part of Affiliated’s network of individually owned stores.

For every rule there are a few excep-tions and unfortunately for aspiring entrepreneurs, Gerald Pierce is the exception. Trying to find start-up money today is extremely difficult. Talk to practically any venture capital company in Dallas and the answer is the same – “No, we won’t touch a start-up business.”

It hasn’t always been that way. Take for instance, 1969, when 548 young companies sold their stock publicly for the first time. That means venture capitalists, who owned quite a bit of stock, could sell out and reinvest their money in new start up businesses. By 1975 the number of companies selling stock publicly for the first time fell to four.

Some of the better deals were developed in the Dallas area, particularly electronic companies founded by former Texas Instruments executives. Among them are Mostek, Spectronics, Optron and Displaytek. Another electronics company, Electrospace Systems, was founded by four former Collins Radio executives.

But those days are past. As one venture capitalist puts it, “After the 1974 recession I don’t think there are many TI executives left who have the courage to strike out on their own, leaving behind the security of a good job. Even if they did, money would be very hard to find.” The reasons are simple – evaluating a new idea and new management is difficult for a potential lender. Even it the idea looks good, there’s no guarantee that the same idea isn’t being developed elsewhere. And if it does succeed, a fledgling company must brace itself to fight a whole host of competitors who are bound to enter the field.

“Too much risk,” says Cliff Osborne, chairman of Capital Southwest of Dallas, which owns one of the few pure venture capital companies left in America. Capital Southwest has made a good living financing deals that were well underway, such as Capital Wire and Cable, a young company which received a $1.5 million loan from Capital Southwest. Capital Southwest and its shareholders wound up with $17 million worth of Capital Wire and Cable stock, plus repayment of the loan. For every smashing success there usually are some losers. Capital Southwest once wrote off a two million dollar loss in one deal, and currently carries a $2.7 million paper loss on a California cemetery company.

Far and away the most common type of venture capital company left today is the small business investment company (SBIC). Dallas has three sizable ones – Dallas Business Capital, which is publicly held, and one SBIC at each of the city’s two largest banks, Republic and First National. SBICs raise money privately but also borrow even larger sums from the federal government, burdening them with certain regulations which pure venture capitalists don’t have.

None of the three Dallas SBICs is interested in funding start-up companies. They prefer to invest in established ventures. The two big bank SBICs have a special reason for lending – besides making money for the bank they provide a source of offbeat loans for regular bank customers.

Life in the venture capital business still does have its exciting moments. There are those ineffable times when a venture capitalist is faced with an “unusual” proposal. Tom Hicks, president of First National Bank’s SBIC, once received a letter soliciting funds for establishing a worldwide network of religious communities. A slightly weirder deal was advanced to Mike Stone, Republic’s SBIC president. “The man was going to build a self-sufficient community in a cave, complete with grass, cattle to eat the grass, and people to eat the cattle,” Stone said. Perhaps the most inventive idea was put to Capital Southwest’s chairman Cliff Osborne. “One day a guy came in here wanting money to build a factory for producing inventions,” Osborne explained. “You’d tell him what you wanted invented and his inventors would do it, right there in the invention factory.” Too risky, Orborne winked.