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This new industry is called the intelligent terminal industry, and companies such as Datapoint, Linolex, Sycor. Incoterm, Vydec, and Data 100 have spawned, in the United States. They are growing companies. The impact of their product can be felt more in the front office and will be a key factor in increasing the productivity by automation of the white collar functions.
An example is GSA here in the Government has just prepared, I think, about 300 intelligent terminals for the purchasing function that allows them to cut the processing time of a purchase order down from 17 days to 5 days, period of time. And their goal is to bring it down to 1 day.
Another function of this is being worked in the Library of Congress to put in every Congressman's office an intelligent terminal that would allow him to communicate directly with the Library of Congress without having to have people go over there and do the research for him. This is in the test stage over at the Library of Congress.
But I think many of the Government agencies are taking the leadership role in using this new equipment. One of the key things that we want to make a point is that I do not think there has ever been a question in the last several decades of my association with electronics industry about the fierce competitiveness of this portion of the free enterprise. I have included here an article from Business Week, printed in April of 1974, and it says that if the United States is going to learn to hold its own in a hotly competitive world, it needs more industries that can learn semiconductors. There are some concluding statements and other points in there.
My point is that competitiveness comes from having distribution, so I tend to call this distributed competitive free enterprise, as compared to either concentrated industry or concentrated nonmobile capital. In our discussions here, we may be kind of classified as small businesses because we start these things sometimes as one man, but it is never our intention to have a small business, as defined by the SBA terms. We have to prepare for capitalization to finance a company into $50 million to $100 million revenues annually within the first 5 years of existence.
Let me take the case of Mostek. We have raised $5 million of private capital to start the company and had enough success to raise $15 million in two issues of public money. We have retained earnings of $12 million. This $32 million, properly leveraged, in turning our assets efficiently into billings on a 1-to-2 ratio, will allow us to grow from our current $60 million to $100 million. This is kind of the goal of every investment we take a look at. Can it be a $100-million company carry the overhead to contribute back and grow. Below this level, you take a chance of a company's being quite vulnerable.
Now, one of my key purposes in coming here to talk to you today is that a series of random changes have taken place that make it impossible, almost impossible, at least, to duplicate the building of Mostek in the United States today. On April 15 of this year, we sold our Linolex Co. to Minnesota Mining, solely because the capital formation structure that enabled us to create Mostek in the early 1970's no longer exists today.
Now, further than that, our venture capital community 5 years ago was starting between 10 and 15 new such companies in the United
States. To the best of my knowledge, there was only one new high technology company that capitalized in 1974 in the United States, only one. This was down in San Antonio, Tex. They tried to raise $3.5 million, and were undercapitalized by a third, but went ahead on the risk. It is a very treacherous way to do it.
Senator NELSON. To what do you specifically attribute that?
Mr. HANSCHEN. Well, the question was asked earlier. I attribute it to the breakdown of the chain-what you have in the strategic plan of financing our organization--that is, that you start with private capital, fellows like ourselves, putting up our money and taking the risk. This was backed up by what we call second-level investors that might be industrial organizations or it might be wealthy families or might be SBIC's. Now, when they put the money--they are confident that an investment banker will, when this achieves a certain maturity, will take it to the public and raise more capital because these things are in continuous need for capital, if they are going to grow. You can only grow a company from retained earnings at about a 15- to 20percent rate per year, if you retain all of the earnings. But these companies, because of their size, demand 100-percent growth rates, 50percent growth rates as they mature. It is very seldom you want to be under 30 percent, so there must be an infusion of capital.
Coming back to the investment banker, he will not take it out to the public unless he can get the venturesome funds to invest. We might call these the hedge funds, or the venturesome mutual funds. They will not invest unless they see down the road the possibility of further capital coming in for the pension funds. Now, that is where the chain has been broken, just in the last six months, so that the confidence factor reflected all the way down this chain has just been decimated, and you cannot get the investment banker, and there have been two in the United States that are outstanding in taking high quality things. It is Tommy Unterberg of Unterberg-Towbin in New York, and Hambrecht and Quist in San Francisco have had an outstanding track record in bringing these things to the public, and with the public getting a very good return on their investment over a period of time. I do not think either one of them have in their plans a new issue to bring out, and I do not think they have--Dave, do you know of anything they have brought out in a brand new issue in the last year? Mr. MORGENTHALER. Little or nothing.
Senator NELSON. When you made reference to the investment bankers and their connection with the pension funds. What did you mean by that?
Mr. HANSCHEN. I am saying here that the investment bankers will underwrite, buy the stock, and sell it to the mutual funds. As the company grows, the mutual fund will want to see money come into the company to further investment banking activities, when it becomes mature enough from the pension funds. Right now, a pension fund manager, the man who invested really in Mostek, Morris Ruggles, says when he invested in it, and it was about a $7 million companytoday it is $70 million-he says that he, because of these new regulations, that he cannot even put it on a list to study, because of the fiduciary implications of the new pension law. So that he cannot consider an investment into a company that is an order of magnitude larger
and has grown. In other words, the pension fund managers today will not look at a company doing less than $100 million a year. Many of them will not go under $250 million a year. They just will not even review them.
Senator NELSON. And that is because of the
Mr. HANSCHEN. Fiduciary responsibilities.
Senator NELSON. The fiduciary responsibilities are so tight, and the responsibility is so great?
Mr. HANSCHEN. Right, so, you know, if you cannot get this flow of capital to the corporation coming down if your whole strategic plan that has been set up is just eliminated, and you are down to the point where you do not even want to start, because you do not see the flow of capital coming in.
Senator NELSON. And there is a substantial percentage of that kind of capital that has come from pension plans in the past, for that kind of a company?
Mr. HANSCHEN. When they get up to that state of maturity, you have to bank on the fact that some time along the line they are going to get mature enough so that at that time, they can come in. And pension funds have been the major source of capital in mature organizations of equity capital-I think if we take it percentagewise over mutual funds, I have been told it ranks about eight times as much capitalthat comes from pension funds as comes from mutual funds for equities of this nature. So again you are close to an order of magnitude of difference there. And the lack of confidence is the factor that has broken the chain, because they do not see those fellows being able to come in, and believe me, we hear an awful lot about IBM competing with them. I personally have no fear of IBM, except their capital strength-the fact that they sit there with all of that hard cash to invest in anything, and they do not have to raise capital, and that they can rent their equipment on a 30-day basis. But we do not need to break them up to compete with them, or any of these things that are being talked about. We just have to have the same capital advantages that they have been able to concentrate and get hold of.
As a result, they can use marketing techniques of rental that a company such as we are talking about here just cannot possibly do--is rent on a 30-day basis without a good capital base.
Going back to some things the fellows were asking on extending the tax loss carried forward more than 5 years, there is no way you can build a company within 5 years that has to rent its product out. It takes about a 12-year time from startup until you have that rental stream big enough to cover your operating losses, especially when you are down on low-cost rental. So some of these things, I think-you know, there has been a change in the times, as far as marketing techniques and using rentals rather than direct sales, and I think they are a real necessity. I would not any more start a company today that had to rent its product in competition particularly with IBM, and only because of rental, not because of technology and marketing a better product or any other thing. It is just because of this problem of capital formation.
Senator HASKELL. Mr. Chairman, may I pursue this a little bit?
Senator NELSON. Let us save the comments, because I was just advised that the Senate has adopted a rule we cannot meet past 12:30. So we are going to have to conclude with Mr. Rohde and the next panel within the next 60 minutes, because of the floor debate. Senator HASKELL. All right. Maybe I can talk to you afterward. Mr. HANSCHEN. Certainly.
Senator NELSON. I think we are going to have to move on with the other witnesses. I did not know they were going to adopt that rule, but because of the pending business on the floor, they are going to require people to be there, so we cannot be meeting.
Thank you very much.
11. "A REPORT ON SELF-EMPLOYED AMERICANS IN 1973," BY ROBERT N. RAY, MONTHLY LABOR REVIEW, JANUARY 1975, PAGES 49-54
[From Monthly Labor Review, January 1975, pages 49-54] A REPORT ON SELF-EMPLOYED AMERICANS IN 1973
AFTER DECLINING STEADILY FOR MORE THAN A CENTURY, THE NUMBER OF AMERICANS WORKING FOR THEMSELVES HAS BEGUN TO STABILIZE
(By Robert N. Ray)
Robert N. Ray is an economist in the Division of Employment and Unemployment Analysis, Bureau of Labor Statistics.
The long steady decline in the number of Americans who are selfemployed appears to have leveled off in recent years. The proportion of Americans running their own business or farm, however, continued to decline between 1967 and 1973, a trend that has been present for more than a century.1
In 1973, about 1 in 12 Americans was his own employer. About a fourth of these 7.2 million workers were in agriculture, still the largest source of individual entrepreneurs. Other industries with significant numbers of self-employed workers were construction, trade, and miscellaneous services. Among the self-employed, construction was the only industry to increase its proportion and agriculture the only one to see its proportion decline.
Because of the legal and financial advantages of corporate ownership,2 many proprietors and partners have incorporated, thereby technically leaving the self-employed classification. Many, however, still retain a close emotional attachment to the concept of working for oneself. Beginning in 1967, new procedures were introduced into the Current Population Survey that made it possible to identify and remove. these people from the self-employed classification, correctly reclassifying them as employees of the businesses they operate.
As a result, the level of self-employment was reduced by some 850,000 in January 1967, nearly all of it in nonagricultural industries. In light of this important change, this analysis will be limited to statistics from 1967 forward; when comparing recent data with earlier years, the reader should keep this distinction in mind. (See tables 1 and 2.)
1 See Michael Maccoby and Katherine Terzi, "Work and the American Character." 1972, cited in Work in America: Report of a Special Task Force to the Secretary of Health. Education, and Welfare, prepared under the auspices of the W. E. Upiohn Institute for Employment Research (Cambridge, Mass.. The MIT Press, 1973), p. 21.
The self-employed operate at a disadvantage in comparison with corporations because they cannot raise capital through the sale of stock. Corporate investment is normally an attractive form of ownership because of its limited liability. If the business becomes bankrupt, the most the shareholder could lose would be his original expenditure per share. His personal estate (apart from the value of his stock) would not be endangered.