Ante Up: Investors take risks on local businesses

In several instances, investors have pooled their wherewithal and channeled their money into small- and mid-size businesses that were having trouble turning innovation into profit.

Risky proposition

Picking the right company or franchise, in some cases, can be a risky proposition, said Steve Fox, CEO and general manager of Springfield-based Quest Capital Alliance LLC.

“Private equity has outperformed the stock market as a whole … but it’s not for the faint of heart,” said Fox, one of seven local businesspeople on Quest’s management committee.

Fox formed Quest in January 2001 with Jack Stack, CEO of SRC Holding Corp., and Jay Burchfield, chairman of Trust Company of the Ozarks. The group initially invested $6 million and established a second fund in early 2005. Almost half of that $8 million pool has been invested, Fox said.

There’s been no shortage of investment opportunities for Quest, which receives a steady stream of referrals from banks and chambers of commerce as well as inquiries from entrepreneurs.

Quest’s investments represent a hodgepodge of business and industry. They include: Decorize Inc., a Springfield-based wholesale supplier of home furnishings; Marine Electrical, a Lebanon company that manufactures electrical wiring for boats; PlayTribe, an Ozark outfit that imports commercial-quality playground equipment; and Red Monkey Foods, a Mount Vernon purveyor of organic seasonings.

The businesses may not seem to have anything in common, but Fox said they share an important trait that attracted Quest’s investors.

“The No. 1 thing is management and the entrepreneur who can make it happen,” he said.

Almost as important, added Fox, is a product that caters to a well-defined customer niche.

Quest is different from most venture capital groups in that it provides management assistance to companies in which it’s invested. One of those companies is Quest Manufacturing Inc., a Strafford-based air-tank manufacturer struggling to stay afloat with soaring steel prices, Fox said.

Differing strategies

Other local investors have taken a more passive investment strategy than Quest, which on average sees a 20 percent return on its investments – including losses, Fox said.

Take, for example, a group of four venture capitalists who formed a limited liability company in response to a specific business proposal. DHST LLC invested $3 million in Gusto, a locally based travel Web site conceived by Jeff Wasson of Springfield.

Wasson pitched his business plan to American Dehydrated Foods Inc. founder William Darr, who lined up financing with fellow ADF executives Kurt Hellweg, Thomas Slaight and Ronald Terry.

ADF President and CEO Hellweg, who is also Darr’s son-in-law, said Springfield is a “great environment” for investors looking to pump money into an innovative startup business.

“There are lots of intelligent people looking for a break, and there are a lot of good ideas percolating out there,” he said.

But some investor groups and private equity firms stick with more conventional investment opportunities.

Since moving to the Ozarks last year, Clint Kasten with StoneBrook Capital LLC has been looking to invest in service-oriented businesses with annual revenues between $2 million and $10 million.

But even with 15 years of deal-making under his belt, Kasten and his fellow investors came up empty-handed after reviewing 50 to 60 prospects.

Many of the businesses seem to be on “cruise mode” and aren’t comfortable with the firm’s desired profit margin, he said.

“We’re looking for a pretty high return on investment, because we’re making a high-risk investment in a company that has yet to make the transition,” Kasten said.

The honeymoon

On the franchising front, a small group of local investors formed Oven Spaces LLC in early 2005 to purchase the rights for San Francisco Oven restaurants in southwest Missouri and northwest Arkansas.

Architect Brian Kubik of Buxton-Kubik-Dodd, accountant Paul Freeman – owner of Computech Mailing Service – and restaurant manager Jeff Hurshman worked together to open the first local SFO franchise on East Sunshine Street just east of Glenstone Avenue last month.

Kubik said he and his business partners defied naysayers who tried to discourage them from opening “another sandwich shop.” They agreed the market could support the upscale eateries, which tempt customers with gourmet sandwiches, brick-oven pizzas and a medley of beer and wine.

“We still don’t know if it’s going to work,” he said. “But we hope the honeymoon continues.”

The trio intends to open four franchises over the next four years.

Kubik said the franchise fee is $25,000 per restaurant and 5 percent of sales in royalties. Startup costs range from $600,000 to $900,000. Kubik said the group was able to obtain the financing due to Freeman’s accounting skills and a solid business plan.[[In-content Ad]]