John C. Weiss III and William M. Gust II are out to help adolescent companies -- those firms at that awkward age when they have outgrown the cuteness of a start-up venture but have yet to gain the stature of a mature enterprise.
These companies, often neglected by venture capital funds and banks alike, have a new friend in Anthem Capital L.P., a Towson-based investment fund recently established by veteran investors Mr. Weiss and Mr. Gust.
The first of its kind in Maryland, the fund has qualified for a new Small Business Administration program that provides money for equity investing while boosting the return of private investors.
Unlike other capital funds -- which mostly invest in new high-technology firms throughout the country -- Anthem will concentrate on more traditional companies in its own back yard that are struggling through later stages of expansion.
That problem is faced by many firms.
Spanking-new high-technology companies, enjoying annual revenue growth of 50 percent to 100 percent, can attract the attention and money of venture capital funds looking for lucrative, yet high-risk investments. But once growth slows down to 20 percent to 30 percent, investment firms lose interest and banks won't lend money because balance sheets aren't strong enough.
This situation has long frustrated Mr. Weiss, who is chairman of the fund, and Mr. Gust, the president.
They "have seen many, many attractive financing opportunities go unfunded because they weren't true venture capital profiles, and they weren't mature enough for conventional bank financing," Mr. Weiss said.
"We wrestled for years with how you make a mechanism or an investment partnership that can take advantage of that," he said.
The solution was a program offered this year by the Small Business Administration, which provides $2 for every $1 put up by private investors. Because the SBA receives a lower return on its investment, the rate of return for the other investors becomes proportionately higher and comes closer to representing the returns enjoyed by investing in start-up firms, Mr. Weiss said.
"This leverage allows us to provide expansion financing that would not be attractive to the venture capital funds," he said.
So far, the SBA has licensed 18 such companies, and the Anthem is the only one in Maryland, according to SBA spokesman Mike L. Stamler.
The program differs from earlier SBA efforts because it encourages equity investments by not requiring a specific payback schedule, he said.
Such financing can be critical for an expanding company, according to William P. Tew, chairman and chief executive of Chesapeake Biological Laboratories Inc., an Owings Mills maker of sterile injectable drugs.
His 5-year-old company, which has 75 workers, has struggled with the problem for years before establishing an "excellent relationship" with a local bank.
The fund also has the support of the Maryland Department of Economic and Employment Development, which has invested $500,000 in the fund.
"It allows for the plugging of a very important gap," said DEED Secretary Mark L. Wasserman. "It represents a special opportunity for us."
The new fund has been able to raise $12.6 million from 12 investors including the state, Baltimore City, Delaware and various banks and foundations. The two largest investors are NationsBank Corp., which has a $3 million investment, and MBNA Corp., a Newark, Del., credit card company that also has a $3 million stake.
These funds are being matched by $25.2 million from the SBA, increasing the total fund to $37.8 million. Ultimately, the fund wants to raise $30 million in private funds with a $60 million SBA match.
The first investment is expected to be in a medical device company, Mr. Gust said. A mattress manufacturer and a lumber mill may be the next candidates, he said.
Until last April, Mr. Weiss, 46, was managing director of the Maryland Venture Capital Trust, a state investment fund in which $19.1 million of various government funds were invested in venture capital funds to encourage those funds to put money in Maryland companies.
Starting in 1972 as a community banking officer at the Union Trust Co., one of the predecessors of Signet Bank, Mr. Weiss has held a series of jobs in banks, venture capital funds and the Baltimore Economic Development Corp., which is now the Baltimore Development Corp., the economic development arm of the city.
Mr. Gust, who was president and chief executive officer of the Chesapeake Venture fund before helping to form Anthem, has managed a variety of investment funds and held executive positions at two stock brokerage firms -- First Boston Corp. in San Francisco and L. F. Rothschild & Co. Inc. in New York.