Idaho Company Wants to Launch Unique Equity Guarantee in Arkansas

Arkansas could be the launch pad for a nationwide equity guarantee insurance program that its founder says should triple the number of businesses operating in the state within five years. The plan is to entice the investment of nearly $100 million in Arkansas businesses by reducing the risk to venture capitalists.

A half dozen other states including Oklahoma, Texas, Pennsylvania and Maryland are also in the running. The first to establish a reserve fund for guarantees, which for Arkansas would total about $7.5 million, will get the deal and the national exposure that’s expected from creating the next haven for developing companies.

Like Arkansas, most of those states have huge tax revenue problems. So the prospect of a supercharged economy has prompted politicians, investment bankers, venture capitalists and educators to listen carefully. About 60 prominent Arkansans have already heard presentations and begun cautiously optimistic talk about American Venture Resource Association and the affiliated AVRA Financial Inc.

Dr. Allan Isen — founder, chairman and president of both Sun Valley, Idaho, entities — said it will be easy to raise the remaining working capital that AVRA Financial will need once a reserve is established. He expects the reserve money to come from foundations, institutional investors or state economic development agencies.

Isen said the reserve would operate as an interest bearing loan that’s backed by equity positions in startups and its own insurance premiums. Instead of putting that money into funds that are then invested in business ventures, Isen’s patented Equity Investment Guarantee System will guarantee 50 cents on the dollar for potential investors.

“Everyone wants to invest in venture developments because that’s where the appreciation occurs,” Isen said. “But everyone is afraid of risk. We’re bringing a program to Arkansas that’s going to attract companies and venture capitalists who are going to come with their checkbooks out.

“If we can get support from within the state, we can be operational in Arkansas by the end of the year.”

So far, privately held AVRA Financial, which will own AVRA Insurance Co., has spent about $1 million for marketing. A public offering in year five is also part of its business plan.

How it Works

AVRA, a 501(c)(6) national association, has a contract agreement with AVRA Financial to serve as an affinity or “captive” group comprised of entities with common goals — such as enterprise developers, venture and other investors and professional service providers.

The group is a legal requirement for AVRA Insurance to offer special coinsurance (not otherwise available to the general public) to the association’s members. That insurance can be applied for by members and used to hedge investments made into their businesses. Association memberships will require a $250 initiation fee and at least $100 in annual dues.

Captive insurance associations were legalized in Vermont in 1981, and since that time about 15 additional states followed suit. AVRA Insurance will be chartered as a Vermont company so it can do business throughout the United States similar to the way many firms register in Delaware because of its favorable corporate laws.

AVRA member companies seeking funding from investment sources can apply for precertification for insurance against their failure. Beta Rubicon Inc. of Fayetteville has signed a letter of intent with AVRA Financial to serve as its nationwide due-diligence provider.

A “thumbs up” from Beta-Rubicon will qualify members for the insurance, which in turn will enable the firm to allay potential investor fears. Isen said the net result for viable startups should be better access to the money they need to grow.

Reserve funds, typically seven to 10 times less than the underwriting insurers can have on their books, are required by state insurance departments. AVRA believes Arkansas needs a reserve of at least $7.5 million and plans to only underwrite up to five times that amount.

AVRA Insurance’s guarantees would then total about $38 million or half of $76 million in investments. Because the bulk of the insurance premiums will feed directly back into the reserve, it’s also expected to grow the potential for new investments and enterprises closer to the $100 million range.

A national reserve will also be built on 5 percent of the premiums from the various state reserve funds. It will act as built-in reinsurance for the smaller funds. A 2-2.5 percent equity stake in each of the startups it helps insure will fuel AVRA Financial.

Isen said he has also met with several large corporations that are interested in making corporate sponsorships that would further buoy AVRA. The key is for Beta Rubicon to do a thorough job on the front end, so that as much of the reserves as possible remains intact.

Isen said AVRA would be able to sustain a failure rate of 36 percent. Ron Goforth, Beta Rubicon’s managing member, said he would endeavor to keep the number much lower.

To further ensure success, AVRA’s Financial’s equity stake in its clients would allow its management to initiate turnarounds in troubled companies. Coverage is for four years.

Why Arkansas?

AVRA Financial CEO Howard L. Feldman said the firm wants to get started in middle America. AVRA’s management believes it will seem more accessible to the companies it’s targeting — early-stage ventures probably seeking funding in the range of $500,000 to $7 million — if it’s not based in an economic hotspot such as California’s Silicon Valley.

Also, the recent venture capital interest stirred up by the Arkansas Venture Forum, the state’s own economic shortfall and a welcome mat rolled out by state leaders has made Arkansas attractive. Feldman and Isen said the ability of Fayetteville’s Doug Douglas and his son, Kenneth Douglas, to get them time with state leaders was encouraging

“The business and political leaders who are involved will be able to say they helped put together a system to encourage investors and companies to invest in Arkansas,” Feldman said. “If we get started here, and there’s a bio tech firm in California that wants AVRA’s insurance to help them get say $2 million in funding, we’re going to tell them to move their company to Arkansas.”

Isen said because the approach is a departure from the traditional funding enticement of offering state tax incentives, there has been a learning curve during his presentations. The Northwest Arkansas Business Journal spoke to more than 20 investment bankers and bureaucrats about AVRA and nearly all of them were enthusiastic.

Sam Walls, chief operating officer of the $170 million Arkansas Capital Corp. Group in Little Rock, did offer some skepticism. He said although Isen should be commended, he worries that AVRA’s plan may be difficult to implement.

“I think it has promise,” Walls said. “But the whole thing is predicated on a manageable number of losses. If the losses become unmanageable, then you have a very serious situation. Also when a company becomes troubled, AVRA will have a strike team go in and do a turnaround. I’ve been in this business quite a while and that isn’t so easy to do.”

Walls did say he hopes AVRA is successful because that would be good for Arkansas.

“We’re no different than a stock broker who’s trying to do business with a client for the first time,” Feldman said.

Above AVRA-ge Team

AVRA’s management team has a combined 300 years of Wall Street financial experience. An additional advisory board of nationally prominent entrepreneurs includes Harrison-based Timothy J. McFarland, chairman of the Arkansas Venture Forum.

Charles Heller of $260 million Gabriel Venture Partners in Annapolis, Md., founded the Dingman Center for Entrepreneurship at the University of Maryland Business School — one of the earliest entrepreneurial teaching program in America. He said he joined AVRA’s advisory board because it appears to be the only system that can excel in today’s market.

“The idea of guaranteed insurance for investors intrigued me because the risks involved with companies at very early stages are high,” Heller said. “With the economic downturn that we have today, people are very reluctant to make these kinds of investments at all. The AVRA concept is probably about the only way that you can break this logjam.”

Isen, 76, said that in his lifetime he’s seen America lose the steel industry, the clothing and fabric industries, half of the automotive industry and most of electronics. The country has remained strong though, he said, because entrepreneurs created new businesses to take their place.

“AVRA is about sustaining that entrepreneurial process,” Isen said.

AVRA Management Team

• Allan A. Isen, 76, is chairman and president of AVRA Financial Inc. and its affiliated national organization, the American Venture Resource Association in Sun Valley, Idaho.

• Howard Feldman, 55, is CEO of AVRA in Sun Valley, Idaho. He has been associated with the Wall Street investment banking community for 30 years. He has extensive relationships within the financial community, including a proprietary network of more than 300 institutional investors. He was the Southeast regional manager for Drexel Burnham Lambert from 1984-1990.

• R.R. Goforth, 50, is AVRA’s director of underwriting. He is president of Beta-Rubicon Inc. in Fayetteville and has spent 25 years in management consulting. He’s the former director of research and environmental affairs for Syncrude Canada Ltd., and a former tenured professor at the University of Arkansas where he founded the Center for Artificial Intelligence and Expert Systems and the Advanced Manufacturing Technology Laboratory.

• Robert Callagy, 58, is a director and southwest territory manager for AVRA in Dallas. The lawyer has 20 years of executive level management experience in mergers and acquisitions, startups and service companies. He led major legal and data initiatives for EDS and for the Exxon/Mobil merger.

• Jim Ross, 51, is a director and central states territory manager in Louisville, Ky. He has 25 years of corporate and investment management experience. Ross has directed corporate acquisitions and restructurings. From 1975 to 1998, he was president of Aegon USA. He is “of counsel” at Goldberg & Simpson in Louisville, Ky.

• Ric Yocke, 48, is moving from Oakland, Calif., to Sun Valley, Idaho, to serve as president of AVRA Financial Insurance Co. He has 30 years of insurance industry experience and has formed captive insurance companies for hundreds of corporate and association clients.

• John J. Seeger, 62, is a director and vice president for business development for Tower Creek Investments Inc. in Sun Valley, Idaho. He has 30 years of computer industry experience as a founding stockholder and chief financial officer of Indeserv Inc. and president of Cirvis Inc. He was controller for Core Capital Management in Beverly Hills, Calif., dealing primarily in hedge funds and the gaming industry.

• Ray Cairncross, 57, is managing director of AVRA and mountain states territory director. Based in Sun Valley, Idaho, he is a successful venture capitalist with 25 years as a practicing lawyer and as founder, chairman, CEO, director and counsel to information technology, biotech and other companies. He participated in the founding of Horizon Airlines in Alaska and led it to an acquisition by Alaska Airlines. He leads an angel network of investors in the Northwest.

• Jeff Bacsik, 49, is the chief financial officer of AVRA. A former partner at Deloitte & Touche and the market unit leader of its Japanese Services Group, he lives in New Jersey. He has 25 years of experience that includes consulting on a dozen IPOs and overseeing accounting and SEC compliance for numerous transactions and companies.

• Mark Francis, 39, serves as managing director of AVRA in Menlo Park, Calif. He has 17 years of executive and management experience. Francis has raised $70 million in venture capital to launch eight companies and served as CEO for two firms where he restructured all operations to reach historic profits.

Isen Leads Amazing Life

The inventor of the geometic shape for the first soft contact lens in 1964, Dr. Allan Isen spent 12 years each leading venture financing projects and later corporate turnarounds on Wall Street.

But the optometrist said the six years he spent working privately for former President Lyndon Johnson may have been his most interesting. Isen had a private optometry practice in Buffalo, N.Y., and had started hard-lens manufacturer Frontier Contact Lenses Inc. in 1957. Then-Vice Presidential candidate Lyndon Johnson wanted to wear contacts for television debates while on the campaign trail in 1962, but couldn’t find a pair that fit comfortably.

Isen wound up being the only doctor who could fit Johnson with lenses.

“He and [future] President Kennedy were on the campaign trial, and the motorcade stopped at my office,” Isen said. “It’s astounding, but I eventually lived in the White House, and when [Johnson] later ran against Goldwater I got to do some polling work.”

Isen, also a World War II veteran, merged his contact lens businesses into publicly traded Frigitronics Inc. after the Johnson administration. He later sold out to pursue deals on Wall Street.

The idea for AVRA came after former Idaho Gov. Cecil Andrews, during a 1988 dinner with some mutual friends from the Carter Administration, asked Isen to research programs that states had used to promote the formation of businesses. Idaho’s legislature never passed Isen’s proposal because the state was able to successfully recruit California startups with tax incentives.

So Isen had the concept patented. Two additional patents related to the securitization of equity transactions are still pending.