By Peter Brennan
December 2000 - A year ago, Benjamin V. Rodriguez raised $1 million from friends and relatives to start Arbol Media in Orange, California – a company that combines online and off-line services, with plans to open storefront Info Centers in the top 10 Hispanic markets in the United States.
Mr. Rodriguez, 26, now wants to raise between $5 million and $25 million from venture capital funds. He’s had to adjust his business plan almost monthly, but he remains optimistic.
“Contrary to other people’s beliefs, our experience has been very positive,” says Mr. Rodriguez, whose online properties include BusqueLoAqui.com. “We like the venture capital community. A lot of these individuals are very successful, and that’s a plus. At the end of the day, you have to have a viable business model that will be able to stand on its own and generate revenue and profits – that’s what they’re looking for.”
One executive who could provide advice about the process is Manuel D. Ron, who recently raised $5.8 million for his company, Actiant Inc., a New York-based provider of hosted e-commerce infrastructure for industrial suppliers.
Mr. Ron, who holds an MBA and a law degree, said the process was tougher than anything else he’s ever done, including his service as a first lieutenant in the U.S. Army’s 18th Airborne Corps, where he served in South Korea and worked to build an airstrip in Honduras in the mid-1980s.
“You have to be a dog on a bone,” he says. “You pick up the newspaper and read that someone wrote an idea on a napkin and got $10 million – but that’s not the reality. Less than 1 percent of companies get VC funding in the first round. If you get past the first round, you’re a 1 percenter.”
If raising venture capital is inherently difficult, it’s doubly tough for minority entrepreneurs who neither attended Ivy League schools nor have the right connections. In a recent study, “The Minority Business Challenge,” the Milken Institute found that of $97 billion in the private equity market last year, only $2 billion was managed by companies whose focus is supplying capital to entrepreneurs from traditionally underserved markets.
“Despite advances in venture capital, mezzanine debt, and asset-backed securitization, the vast majority of minority firms do not have access to financing technologies available to larger companies,” the report says.
But there are some signs that the VC market is opening to minority-owned businesses. Venture capitalists say they are seeing more minorities who have the background they’re looking for – those with either engineering degrees or MBAs or with top-level management experience in large corporations. State and federal governments are implementing new tax incentives to encourage investments. Large-scale pension funds such as that of the state of California are putting money into minority-targeted venture funds. And banks and insurance companies have started VC funds as a way to comply with the federal government’s Community Reinvestment Act, which requires banks to invest in the areas where they collect deposits.
There are other signs of progress as well. The U.S. Hispanic Chamber of Commerce has created the Private Equity Fund LP, which to date has raised $5 million from Bank One and $10 million from Verizon Communications. The fund’s managers intend to apply to the U.S. Small Business Administration for the creation of a Small Business Investment Co. that would enable the private capital to be leveraged to upwards of $150 million.
Last July, the House of Representatives approved by a wide margin the New Markets Venture Capital Program Act. Authored by Congresswoman Nydia M. Velázquez (D-NY), the act provides tax credits, regulatory assistance, and access to capital for economically disadvantaged communities.
Last year, the energy giant Enron launched Enron Investment Partners to fund businesses owned by minorities and women. “For us, it was an easy call. We like to get into markets that are new and are opening up,” says Gene Humphrey, chairman of Enron Investment Partners.
Five years ago, several large New York commercial banks founded the New York Community Investment Co. LLC, which today co-manages a $30 million fund.
“Minorities traditionally haven’t had access to mainstream financing or funds from friends, families, or angel investors,” says Angel Garcia, an analyst with the New York fund. “Companies like ours can make all the difference.”
But what could stir even more investment is risk-taking. Consider Syncom Capital Corp., which has focused on investing in communication companies in inner-city neighborhoods. Among its bigger gambles were Radio One, now with a market cap that has ranged from $500 million to $3 billion, and Buena Vision Telecommunications, an East Los Angeles cable company that was recently purchased by Adelphia.
In today’s market, venture capitalists typically look at four principal criteria: top management, patented products that cannot be duplicated by rival firms, the capability to generate $1 billion in annual revenues, and a hot sector favored by Wall Street. Venture capital funds that focus on minorities often view these criteria in a different light, however.
For example, “top management” can be a code for going to the right school. Mr. Ron says he’s found that venture capitalists tend to invest in companies where the executives have attended top universities, particularly Stanford, Harvard, or Wharton at the University of Pennsylvania.
“My company is right off the block,” he says. “We didn’t go to the right schools. When you’re banging on the door and you’re a half-Hispanic guy from Queens, not from Harvard or Stanford, the deck is stacked against you. But if you believe in your business and believe you can make a lot of money, you never quit. In the Airborne, we had a creed: ‘Never quit and never die.’ You need that creed.”
Although minority-focused venture capitalists look beyond pedigree schooling, they, like other venture capitalists, believe that management acumen is key.
“You invest in people who you think have a reasonable chance of executing the plans,” says Herbert Wilkins Sr., founder of Syncom Capital Corp., one of the country’s oldest VC firms to focus on minority-owned businesses. “You look at their backgrounds, their character, their past accomplishments, and what they’ll be able to do going forward. They must have the capacity to attract strategic investors. It’s the people that you invest in. That makes the difference in a deal.”
While today’s mainstream venture capitalists routinely seek astronomical 100-to-1 returns, those who run minority-targeted funds often are content to settle for less. Enron Investment Partners is seeking a portfolio return of 30 percent annually. “That’s nothing compared to what a lot of high-tech firms are looking at. We think 30 percent is an achievable rate of return,” says Mr. Humphrey.
To date, the Enron fund has invested sums ranging from $100,000 to $4 million in 15 businesses. It has focused on tech companies but also is taking chances in other areas, such as a 200-seat bilingual call center in Houston.
That’s a key difference. Most general market VC firms invest almost exclusively in high-tech companies. The VC firms funding minorities, however, are willing to take chances on franchises, manufacturers, and businesses in other sectors – provided the companies are intent on growing.
“We don’t want to invest in what I call ‘lifestyle,’ where the principal is making a good living but doesn’t want to grow,” says Mr. Humphrey. “We don’t do a corner grocery store. That’s not going to grow beyond that location.”
Fund managers concede that there are daunting hurdles to overcome. They demand elaborate business plans with revenue, cash flow, and profitability projected out five years. The New York Community Investment Co. receives 300 business plans a year, but in five years has invested more than $20 million in only 51 companies in increments of $50,000 to $1 million.
“We have a social mission, but we are a for-profit fund,” says Mr. Garcia. “We have to make a profit for our investor banks.”
Thus far, the New York fund has financed only one Hispanic-owned firm – Mr. Ron’s Actiant. “We want to get the word out that we are looking for companies to fund,” says Mr. Garcia.
Actiant is now going for a second round of $15 million. If it comes through, Mr. Ron plans to triple his work force to 120 employees. “Once you get past that first hurdle, you have a higher probability of getting funding again,” he says, adding that the often difficult process has been well worth it.
“I’m having the best time in my life. We find ourselves at a junction in history where a bunch of guys off the block can make some meaningful wealth and participate in the creation of really good things.”
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