Venture Collateral

Date:  Wed, 1999-06-16

Virginia David Martin aims to revolutionize the world of commercial lending. By: Lorri Montgomery

David Martin sat in his Charlottesville office and listened to a conversation that would change his life — and may quite possibly change the world of banking.

In October 1997, Martin and two other businessmen — one a commercial credit lender and the other an entrepreneur holding an asset worth roughly $15 million — were discussing ways to get the entrepreneur’s business started.

“He had a request for a loan of around $300,000,” recalls Martin, the founder and president of Mosaic Technologies Inc. “The lending officer says, ‘Sorry, you don’t have anything I can lend against.’

“I was sitting there going, wait a minute. I heard that from bankers for so many years, that same thing — ‘Oh yeah, we see it has value, but we just don’t understand it.'”

What the lender didn’t understand was how to value the entrepreneur’s asset: a trademark.

In the days that followed, that conversation played over and over in Martin’s head as he began to work on Mosaic’s annual report.

“Mosaic had always been providing services to start-up companies, and we’ve got equity in these companies. We always wondered if this equity was ever going to have value,” Martin says. “So I thought to myself, ‘Gosh, this is a really lousy business model, because here Mosaic was always taking equity as payment, but I’ve got a file cabinet full of stock in companies that may or may not ever be in existence.'”

For the next three months, Martin worked day and night — “not breathing a word of this to anybody” — developing a new financial business model.

“I went through all kinds of scenarios. I tested it against every financial assumption I could come up with, and I did that because it seemed to big to be true. I said that before I embarrass myself, I’m going to test the heck out of this assumption. Every time I did, it kept getting bigger than I thought it was.”

On Jan. 18, 1998 Martin marched into a meeting of Mosaic’s board of directors and announced, “Guys, this is what we’re going to do. Everyone’s jaws kind of went, ‘What?'”

After board members straightened up and listened to Martin’s detailed proposal, they launched a new business that is now being touted as having the potential to revolutionize the world of banking.

That morning, the Mosaic board created a spin-off company called M·CAM that would take Mosaic’s technology expertise and combine it with a new lending concept — one that allows banks to use intellectual property as collateral.

M·CAM is believed to be the first company of its kind in the United States, and its presence will soon be felt in Hampton Roads, where M·CAM is in the process of rolling out its product for the first time. Richmond and the rest of the state will soon follow. In addition, Martin is talking to the U.S. Small Business Administration, which is interested in M·CAM’s novel approach to financing.

M·CAM’s basic principle sounds simple, but its application is complex and rigorous. It works by allowing banks to make commercial loans to fledgling companies that have developed solid concepts, but that don’t qualify for traditional bank loans because of a lack of collateral.

It can do this by using Mosaic’s years of buying and selling technologies — whether it’s processing aluminum in Russia or lung cancer detection equipment in Singapore — as its means of determining the worth of specific types of technology and identifying its place in the market.

“In essence, what he’s doing is writing the blue book on technology,” says Dennis Ackerman, director of the Bank of America Entrepreneurial Center at Old Dominion University.

M·CAM is developing a software program that can evaluate the worth of each different type of technology, and in doing so, assess the value of the intellectual property that goes along with it, such as patents, trademarks, copyrights and trade secrets. The program includes a pre-determined depreciation schedule for all technologies.

The program, called First Dollar, will be used by banks, and opens the door for M·CAM to provide collateral to the bank for the intellectual property of a company requesting a commercial loan. If the loan goes sour — just like a car or home loan gone bad — the bank repossesses the intellectual property and must liquidate it to minimize its losses. That’s where M·CAM comes in: if a company fails, M·CAM buys the intellectual property.

The formula for assessing intellectual property is “rigorous, logical and systematic,” Ackerman says of the patented software being developed.

Through this new process, as Ackerman sees it, M·CAM also will create another tier of capital from a secondary market — an auctioning source for intellectual property. For example, when banks repossess property and equipment, such as cars, the bank doesn’t sell the property, it turns it over to a car auctioning company.

M·CAM will be the first company of that type for intellectual property.

Martin makes it clear that M·CAM’s client is the bank, not the company seeking the loan. The banks pay M·CAM a fee for assessing the property and providing the up-front services. In the event the company goes belly up, “we get the assets that are held, we pay back the bank what the bank needs, and we keep the rest,” Martin says. “And the rest is a pretty staggering number. It’s phenomenal.”

If successful, M·CAM has the true potential to “shake up the capital market,” industry analysts say.

“We have found the concept to be very interesting and enticing and we look forward” to seeing a finished model, says Dudley Patteson, senior vice president of Citizens and Farmers Bank in Williamsburg and West Point. Patteson says that if M·CAM’s program can “serve the market in a safe, sound manner,” it will “open up another tier of capital that isn’t available now.”

When Ackerman first heard about M·CAM, his curiosity was piqued. After he and Martin met, they developed a relationship that has since put Hampton Roads in the forefront of this venture.

“I was interested immediately in supporting this,” Ackerman says. Because of Ackerman’s position and experience with the entrepreneurial center, he understands the investment potential in the Tidewater area and the plight of up-and-coming technology companies.

With this in mind, Ackerman is helping M·CAM on two fronts: to develop a large institutional guarantee fund, and to create a regional guarantee fund. These funds will help mitigate the risk of putting up collateral. “There has to be a pot of money that may have to be used until the intellectual property can be sold by M·CAM.”

The funds also will provide another way for banks to know who’s picking up the risks. Ackerman, who is working with regional banks, local investors and large institutions to develop these funds, says it’s a much anticipated service that was bound to happen somewhere.

“It’s fate and circumstance that this is happening here,” Ackerman says. “We’re really lucky he’s [Martin] in Charlottesville. It’s terrific that we are going to get a jump on this market in Virginia and establish a name for ourselves.

“Banks have been watching the technology market grow, and they haven’t been able to be involved. This gives them the tools,” he says.

“I think this is a true leap forward,” says Terry Woodworth, regional director of the Center for Innovative Technology in Charlottesville. “They are doing some really exciting stuff, developing an accurate means of estimating whether or not an asset has appropriate collateral. Their experience gives them the ability to know how to quantify the risk.”

That know-how comes from Martin’s varied experience. At age 32, Martin is a former faculty member at University of Virginia’s medical school, the founder of the Charlottesville Venture Group, a contributor to the discovery of the first cholesterol analyzer test to be used in doctors’ offices and the originator of the first wholly owned, for-profit business with UVA’s Health Services Foundation. And, of course, that doesn’t include his having founded two businesses: Mosaic and M·CAM.

Seven-year-old Mosaic Technologies is a thriving, complex company that focuses on three separate areas: research and development, start-up financing and community service.

“We take projects that are improbable,” Martin explains. “Most of the time, those are technology projects, but we’re not limited to that. We have taken graphic art companies, restaurants — we even helped a buffalo farm get their products to market. We always stay involved through the first round of major financing.”

It started in 1989, Martin says, when he worked as a technology claims analyst for a health insurance company. Martin would evaluate how much technology equipment, such as an MRI, cost the company. His next stop was with a company that worked through the lab at Ball State University, his alma mater. There, Martin worked to commercialize a broad variety of technology.

“I helped launch the first physician office cholesterol analyzers. Think of that — before around 1991, you didn’t ever hear about cholesterol. We put high-tech chemistry analysis into a medical application, and that was the first technology transfer I was affiliated with.”

After that, business opportunities flourished.

Martin began to get referrals for U.S. Food Drug Administration approval for products it was trying to bring into the U.S. market. “I happen to be really good at positioning technology in improbable places. Whether it’s medical technology that applies to an environmental concern or environmental technology that would be of material science concern.”

Along the way, he also developed solid experience in helping companies get their start or reorganize. “We’ve helped restructure, get financing and assist in the turnaround of a company,” he says. “We are an odd group to characterize.”

Odd perhaps, but complex and skilled in many areas, industry observers say, and that’s where so much of their strength lies.

“David happens to know both sides” of business, says David O’Donnell, director of Richmond’s CVEC Inc., alluding to Martin’s understanding of management and finance.

“I’ve never heard anything like it [M·CAM’s program] before, but it seems solid as a rock,” he says. O’Donnell says that through his position with the Central Virginia Entrepreneurial Center in Richmond, he will help feed deals to M·CAM and to explain to people in the region how the First Dollar program works. O’Donnell anticipates that as soon as M·CAM gets a couple of success stories with banks in the Hampton Roads and Charlottesville areas, Richmond banks will jump on board.

“He’s planning this roll-out and controlling it very carefully, so that if there are holes he would see them immediately. He’s put together a team that’s super confident and competent.”

To be sure, Martin is confident in his team’s ability and approach. “Our strength has always been aggregating people, management and resources around opportunities that are worth launching. That’s the reason M·CAM works — because we’ve done it. M·CAM was a very logical thing to come out of us, despite the fact that it’s not logical in most people’s minds. It was the only logical way we could grow.”

Martin’s approach to his business appears to be as much philosophic as it is strategic. Inside Mosaic’s office building, which meanders through a narrow, 100-plus-year-old building in downtown Charlottesville, there are many hints as to what inspires Martin. There’s a framed photo and law degree of his grandfather, who was an attorney for the U.S. Supreme Court Bar and whom he fondly refers to as “my best friend in my whole life.” There’s an artist’s sketch of his wife, who he says “keeps him grounded.” Behind his desk is a large wallboard with “I love you daddy” scribbled in marker by his 10-year-old daughter. And in one corner of his office hangs a black and gold banner that celebrates the Yukon gold rush of the 1890s — something Martin says he reflects on often and relates to constantly.

He says he has always been fascinated by the California and Alaska gold rushes, and connects the discovery of gold in the Yukon — an improbable event that forced people to be creative in ways they never had, he says — to the inception of M·CAM. “What we really do is see opportunity where none existed,” he says.

He tells how a young woman doing laundry in an Alaskan stream found a large gold nugget, and how that discovery sparked miners and businessmen from California to race north. In the end, the Californians, although experienced, weren’t successful in Alaska, because mining for gold there is completely different than in California. “They had to rethink and change the method,” Martin says.

That’s what M·CAM is doing in the world of commercial lending. Instead of lending on equity, Martin emphasizes, lend on assets.

“David Martin is one of the most visionary people I’ve ever met,” says Woodworth. “He’s gone outside the box.”

Martin sees it this way: In traditional financing, where equity allegedly is king, investors still are frequently wrong.

“We look at Silicon Valley and all the places that allegedly have figured this thing out, but you know what?” Martin says. “In the last 10 years, venture capital is still wrong 90 percent of the time. It’s still betting on the 10 percent of the wins that are so big that they eclipse all the garbage out there.

“And in 10 years, we really haven’t gotten a whole lot better. We’re getting marginal hits. Good firms are getting marginal hits at 20 percent, good hits at 10 percent, which means that 80 to 90 percent of the deals that they do are never going to materialize.

“[Ours] is a more conservative way in some respects, but the funny thing is, what we’re doing is being branded as ridiculously, wildly, speculatively risky. We’re taking a model that takes the Wild West of equity financing and puts it allegedly into the stodgy banker suit. But it isn’t, because this isn’t a banker that we’ve seen before. It’s a very different animal. It’s fascinating.”

The fascination doesn’t end with commercial lending. Martin, who considers himself more business prospector than entrepreneur, sees another gold mine waiting to be discovered.

“There’s a whole graveyard” of assets buried in banks everywhere, he says. “It all boils down to one little line” on commercial lending contracts that says in case of a default, the bank will repossess all property, equipment “and all intangible assets.”

Those assets are the patents, copyrights, trade secrets and other intellectual property. M·CAM would like to sift through this graveyard and buy some of the relics back from the banks.

“They’ve already been doing this, but they’ve just never done anything with those assets,” Martin explains. “They take them, but they don’t do anything with them — leading me to one of those obvious points in time where you go, ‘Alright, how hard is this? We are just trying to sell what you already have and don’t think is worth anything.’

“We’re not even asking banks to change how they do business. They’ve taken in these assets all along, now we’re saying use them as assets and stop letting them go into nonexistence because you don’t know how to do anything with them.”

“This is really intriguing,” O’Donnell says, because it allows M·CAM to collect a “basketful of intellectual property” and resell what it can, or to try to combine assets — such as copyrights and patents, etc. — to possibly start another business.

But first, M·CAM must prove itself.

That could start happening soon. The deal on the $15 million trademark that first got Martin thinking back in October 1997 was being finalized at press time. When it closes, Martin says, “it will validate M·CAM’s business premise.”

And that, he promises, will be the real beginning of the story.

David Martin will discuss the details of M·CAM at a meeting of the Virginia Venture Capital Forum in Norfolk on June 15.