According to Capital Publishing Corporation, the generally acknowledged expert spokesman in the industry, venture capital is defined as the

employment of long-term investment discipline with active on-going involvement to provide value added benefits. "Today, when the pursuit of instant gratification is the norm, venture capital stands almost alone in the investment world in its practice of long-term investment discipline and its continuing involvement with the sharing of responsibility. Given the nature of our Colorado financial community, seed, startup and early-stage. development funding is increasingly in search of venture capitol sources. Even for the most established Colorado companies, expansion. financing now requires instead of bank funding, often repeated private placement activity before either taking the firm . public or having it qualify for conventional credit-oriented institutional funding.

Thus the trade-out is in every instance a painful.. business decision. On the one hand, even if you an obtain bank financing, its cost and short-term availability puts a fearful burden on a firm. Yet to go to the equity market often requires restructuring of ownership interest. In other words, the entreprenueur suddenly finds that he has investor partners, which for many promoters is personally offensive though indeed the lesser of evils.

Nationally, today there are 200 to 250 active professionally managed venture capital firms covering all segments of business development, exclusive of oil and gas. In addition, some 200 Small Business Investment Companies are oriented primarily towards lending with little actual equity participation. Several wellmanaged SBI CS support investor needs in our Colorado 'marketplace. To the best of this 'writer's knowledge, however, there is only one major venture capital organization in the. entire Front Range community. Thus an entrepreneur's alternatives are still severely limited

Nationally, in 1979, again according to Capital Publishing Corporation, ... venture capitalists disbursed an estimated one billion dollars across the entire spectrum of investment interests. This was more than double the average disbursements of the past five years when the pent-up demand served in 1979 was created."

To the extent, a Colorado company receives the support of a venture capital firm, it should indeed smile, for the success rate of sophisticated venture capitalists has been brilliant. Investment results from major venture capital firms since 1974 show an average of a 28 per cent compounded annual return on their capital as compared to a slight loss in the Dow Jones Industrial Averages. Many firms have enjoyed even greater successes. Thus, the point is clearly that, for those entities which have venture capital support, substantial returns for all investors are almost commonplace.

We will cover more on the issue of venture capital, capital shortages, capital alternatives, and who is doing what to whom for how much in Colorado, in subsequent articles. In the meantime, however . . . Hello, again!

Senator BAUCUs. I have a question about SBIC, Allan. You said you can only help about 1 out of 10 people. Why is that? What can be done to change the SBIC program to make it more widely available?

Mr. BRADLEY. Our industry is trying to find venture capitalists that will work into it. A venture capitalist can lose or make 100 times his annual salary in his first deal. So, the bottleneck is training venture capitalists, finding more people that can smell a deal and know whether it is good to make it, but it's come along good. I think if it comes to, you say, how do we get more venture capital to small business, it is going to allow us to take a little more risk.

Senator BAUCUS. Is it also a problem of inadequate information? Mr. BRADLEY. A lot of it.

Senator BAUCUS. Hearing Guy talk, it seems like a lot of venture capital money could come to Montana. It sounds like, you know, that there are a lot of opportunities here that people just aren't sufficiently aware of to take advantage of. If they are not aware of them, it implies an inadequate knowledge. How do we solve that?

Mr. BRADLEY. Again, I think the only way that we are going to solve it is to allow the venture capital company that might start up in Montana to take a little more risk without going under, and on SBIC now can't take much of a loss. If we lose 20 percent of our private capital, that's keeping in mind that our private capital is 25 percent of our total capital at any time, we are out of business. So, that's the only possibility I can think of, to put more equity money into small business hands.

Senator BAUCUs. You're absolutely right about the conversion of coal and the energy possibilities in our State. I talked to a fellow who wanted to change his company, a big outfit called Big Bud up in Havre. He wanted to move big tractors, but he just had a hard time getting money to get started.

Mr. MCCLELLAND. It's not only lack of information by the Government, it is lack of information as to the programs that are available to the businesses.

Senator BAUCUS. What is that again?

Mr. MCCLELLAND. The point is, the businessman really isn't aware of the various programs which might help him expand. The Commerce Office has been very good, the Governor's office has been very good, but there are all different levels of information. I suppose we need an office to provide a summary of information to the entrepreneur. Senator BAUCUs. You don't mean government?

Mr. MCCLELLAND. I don't know.

Senator BAUCUS. OK, another point

Mr. MCCLELLAND. You can consolidate a number of existing offices and have less government.

Mr. SCHUMACHER. While we are educating people, why don't we educate potential investors, people putting money in banks and show them sometimes it really does work. The "American Dream" is there, and you can put some money into a stock and win. But explain to them what the risks are, and I have found some people that don't even understand that, to begin with.

Senator BAUCUS. Now, as to the first panel, Mr. Burke, Mr. Clelini, and Mr. Pyfer, I want to thank the three of you for coming and for remaining with us throughout the day. You all are very knowledgeable

and familiar with the problems that we have talked about. You are welcome to read your statements. Again, if you want, you are welcome to just comment or just proceed any way you think is most effective to address the problems. Just go ahead and make the points you want to make.

The full statement, without reading it will automatically go into the record. My staff and the committee staff will be reading those statements and getting the main points out of them, and they will screen the main points and pass them on to me. I probably won't have time to personally read the statements in full, but if there are points in the statement that you want to highlight right now, feel free to go right ahead.

STATEMENT OF ROBERT F. BURKE, PRESIDENT, FIRST NATIONAL MONTANA BANK, MISSOULA, MONT.

Mr. BURKE. My name is Robert F. Burke and I am president of the First National Montana Bank of Missoula and current president of the Montana Bankers Association. The membership of the Montana Bankers Association is made up of 100 percent of the banks in Montana. I am a native of Butte, Mont., received my early education there and graduated from the University of Montana. I have been in the banking business in Montana in various capacities and banks for approximately 23 years and am proud to say that my father before me was associated in this business for almost 40 years. He also served as president of this association at an earlier date.

The remarks that I will make to you today are of a relatively unsophisticated nature. During the course of this hearing you will have heard from different panelists who perhaps are better versed on the specifics of taxation and capital formation than I. Certainly this is true of my fellow panelists, Joe Chelini and Clark Pyfer. Any small businessman who can endure, exist, and prosper is a specialist in my opinion and this can be said of both Mr. Chelini and Mr. Pyfer since both have been successful in operating their respective business even though the businesses serve different needs of the consuming public.

We have been asked, Senator, to devote our attention to capital recovery and capital retention. We have been furnished with a list of the White House Conference Recommendations which your staff has furnished to us including the 15 issue options which received the most votes and see that 5 of the top 15 vote getters deal with capital formation. My comments are directed only to selected items on this list or thoughts generated from the list.

Other witnesses will devote comments to inflation. For further emphasis however, I will add my support to balancing the Federal budget in fiscal 1981. Small businesses and all business will continue to struggle in an economy with a currently indicated inflation rate of 18 percent. The accumulation of capital or preservation of capital is extremely difficult if not impossible for money intensive businesses such as auto dealerships, small manufacturers, retailers, in an interest structure as it exists today.

A major factor in a business' ability to retain capital is its ability to control expense. The major item in that expense is labor and the

efficient use and integration of labor with advancing technology. An uncontrollable part of the cost of labor is the cost of mandatory benefits including the social security tax. Should that tax base be frozen at the existing level as of January 1980 as proposed in the issue options it would give business an opportunity to stop an escalating expense. That would only be possible however if the social security system were put on an actuarily sound basis with a broad foundation to include both public and private sector employees.

I will cover this one thing, because it was referred to earlier. Legislation that is well-intentioned on the surface can become a triple-headed monster in the control of an over-zealous regulatory agency. The tentacles of government regulation extend into every business. Administration of regulations in individual businesses has become another inherent cost that infringes on capital retention. As a participant in a highly regulated industry I have observed and can comment at firsthand on the cost burden of regulation and can only assume the burdens imposed on other businesses. Institution of sunset reviews of laws, regulations, and agencies is a step in the right direction. Involvement of small business in a regulatory review with Congress and the executive branch as well as congressional line item veto could give a practical approach to government regulation.

In reviewing the capital formation and retention options proposed at the White House Conference I was sorry to note that there was no mention of a new jobs credit which was administered much like the investment tax credit. It was my understanding that for the short time that the jobs credit was readily available over 500,000 new jobs were created, and I got that figure from the National Federation of Independent Business. A number of our bank's customers utilized this tax credit when it was initiated through the Tax Reform Act of 1976 and it was a source of considerable capital savings particuarly in construction and construction related businesses. Beyond that I noted that among our small business customers who utilized the credit it was a source of pride in that there was a capital benefit to the business but the business in turn recognized in dollar measurement the additional jobs that it created within the community. It has now been changed to a targed jobs credit which to a great extent negates the beneficial effects for small business particularly in less populated areas such as our State. I would recommend that the Congress review and revise legislation to again make this incentive available to the business community.

In conclusion I would like to recommend to the committee that the Congress continue to investigate the potential of tax credits for savings, and that's been referred to earlier. Some effort in that direction is evident by the planned tax exclusion of interest income of $200 for single taxpayers and $400 for joint returns. An article in the recent copy of Nation's Business states that we ended the decade with a savings rate of a little over 3 percent which is less than half the average during the first half of the 1970's. Banks are marginal businesses. We operate on the margin between what we pay for the consumers' money and what we charge. Historically the household sector has been a major contributor to savings available for capital formation. We need the savers' money deposits to make loans available to individuals