Financial Implants

March 1 1998 by Steve Bergsman


Implant Center Inc. was a small BY STEVE high-tech company with big BERGSMAN problems.

The San Jose, CA, provider of ion implementation to some of the nation’s leading semiconductor companies suffered from poor management, a result of an earlier management buy-out. Sixteen years ago, two managers at what was then GCA Corp. bought out that company’s ion implementation unit and formed Implant Center. It grew quickly, from zero in sales to $4 million in just over three years. Then growth stopped. For eight consecutive years, Implant Center revenues remained absolutely flat.

Art Noeth, who was originally brought in as a consultant but later became chief executive, notes, “the company had been very lucrative, but the owners were interested in taking capital out, not investing back in the company. When I joined in 1994, Implant Center was capital starved.”

However, it was not a technologically weak company. Implantation of ions into integrated circuits is a very complex process essential to the production of modern semiconductor devices, and presently there is no technical limit diminish the use of implantation in the future. Venture capital companies recognizing an important technology came knocking.

Venture capital is generally considered early-stage money, or as it better known, start-up financing. But companies with a considerable history or those that have used other forms of financing-such as bank loans-early in their cycle are also in a position to take advantage of venture capital. Even companies that are already very profitable can benefit from outside financing as excess liquidity can provide management with the latitude to make decisions geared more toward long term gain, says Phil Black, a general partner in Weiss, Peck & Greer Venture Partners.

The California venture capital partnership has invested in start-ups and existing companies for more than 20 years. Its latest venture capital fund boasts committed capital of $208 million. Last year it invested $50 million in 17 companies. Back in 1996, BankAmerica Ventures and Norwest Ventures pumped $10 million into Implant Center, in effect buying 80 percent of the stock. One condition of the buy-out was that Noeth become chief executive.

Late-stage venture capital can work with any type of company, but Black says it is probably more suited for technology companies that may have difficulty raising asset-based financing. The cycle with technology companies is usually very short, and markets move quickly, so there is a fair amount of risk in this field. Nevertheless, Weiss, Peck & Greer shows 75 percent invested in information technology and 25 percent in medical technology.

As if to prove the point that venture capital can be used at any stage of growth, Implant Center turned to an amalgamation of angels (individual venture capitalists) and venture capital funds for an additional injection of $5.4 million last year. The monies will be used to capitalize a second location for the company. “We opened a 34,000-square-footplant, our second,” Noeth explains. “We were able to generate enough cash for the building, but we needed to have the capitalization to allow us to lease equipment and hire people. In this business, you can’t lease equipment unless your balance sheet is strong enough to justify leases.”

For the first financing, Noeth says his company had a number of options, but venture capital looked to be most efficient. “We could have borrowed additional capital, but the amounts available would have been too small. Our balance sheet was not sufficient. We could also have chosen to go public, but the valuation would have been terrible.”

Concerning the second financing, Implant Center had the choice of raising capital from small investors, and that money would actually have been cheaper. But Noeth was thinking long term. He wanted to keep the company’s capital structure simple so future investments would be attractive to bigger players. “Cheapness isn’t the only objective,” he says. Revenues for Implant Centers reached $10 million in 1997, and Noeth expects a rise to between $15 million and $20 million this year. Even with slow, cautious growth, he thinks he can easily bring Implant Centers above the $100 million mark. To do that he would need more financing, and at least three venture capital firms that do investments of $10 million and more are waiting, which is why he wants to keep Implant Center‘s capital structure simple.

“A venture capital firm can be a good financial partner,” says Black. “Companies get the capital needed which, in itself, is a technical and strategic weapon, and hopefully they can also access the technology, moguls, and expertise of the venture capitalist and his cohorts. Venture capital, even at a later stage of corporate history, can facilitate other strategic partnerships and help bring in good, additional management who will take the company public down the road”-an option definitely in the cards for Implant Center.

Steve Bergsman is a Mesa, AZ-based freelance business writer who has written about corporate finance for Reuters, Barron’s, Global Finance and Corporate Finance.