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For General Cluch Corp., the financing alternatives were limited. The Stamford, Conn., manufacturer, which was already selling stock privately and had borrowed funds from a bank, still needed money to launch a new type of industrial clutch.

Chairman and chief financial officer Francis Mechner did, however, have an interested investor -- one whose terms required the company to commit a portion of its future profits to paying back the money invested. Curiously, the financing was neither equity nor debt. There was no security required, and the investor had no intention of taking General Clutch public. Finally, if General Clutch's new product failed, there would be no debt outstanding. The investor, in this case, was the Connecticut Product Development Corp. (CPDC), a state agency that has committed $12.5 million to 59 new products in the past 10 years. CPDC offers an atypical financing scheme in which the state puts up money in exchange for a promise of future royalties and future jobs for state residents.

That is not to imply that the deal comes cheaply. Assuming its new product is even moderately successful, General Clutch's agreement calls for it to repay the state at least two-and-a-half times the amount invested over five years, based upon a typical royalty of 5% of the product's net sales. If the clutch's success is smaller than expected, the payback period would be even longer, although the percentage of the royalty would drop. Ultimately, General Clutch could pay far more than it would have paid to a bank. Says Mechner, explaining why he turned to CPDC last year for $728,400, "It wasn't a matter of cost; it was a matter of availability."

For other companies with limited investment opportunities, state venture capital funds are becoming a more common phenomenon. Connecticut -- along with Iowa and New Mexico -- relies on royalties to recoup its investments. At least 17 other states use a variety of investment strategies, ranging from loans and loan guarantees to equity financing.