News Column

Voice of Experience

July/August 2001

By Janet Perez, HISPANIC BUSINESSģ magazine

Federico PeŮa has worn many hats Ė lawyer, mayor, presidential cabinet member, investment adviser, and now venture capitalist.

He served more than five years in the Clinton administration, first as transportation secretary and later as energy secretary. He was the first Hispanic to hold either position. His public-sector resume also includes a long stint as mayor of Denver and work as a civil rights lawyer.

In the business world, Mr. PeŮa has served as president and CEO of his own investment firm. After leaving the Clinton administration in 1998, he accepted his current job as managing partner in Vestar Capital Partnersí Denver office. Vestar specializes in management buyouts, recapitalization, and growth capital investments.

Consequently, Mr. PeŮa has a unique perspective on the challenges facing Hispanic entrepreneurs. In a recent interview with HISPANIC BUSINESS, he said he will share some ideas on the subject as the featured speaker at this yearís HISPANIC BUSINESS Entrepreneur of the Year (EOY) Award gala. Sponsored by Goldman Sachs, the event will take place October 3 at the Westin Bonaventure Hotel and Suites in Los Angeles.

HB: What will be the focus of your address at the EOY gala?
FP: I may change this a bit, but Iíd like to talk about this notion of what I call the emerging opportunities and responsibilities for Latino business people. I firmly believe that over the next 10 years there will be incredible opportunities for the Latino community in our country, not just domestically but globally. With that opportunity come very significant responsibilities. I am well aware that all of these Hispanic chambers of commerce are terrific, and they are growing by leaps and bounds, and that many Latino business people are actively doing scholarships or embracing schools or helping nonprofits. But I think there is much more that needs to be done in the Latino business community as it develops wealth and becomes successful. Iím looking more at the business community than the Hispanic political community to develop leadership within the next 10 to 15 years.

HB: Are there entrepreneurial lessons to be gleaned from the recent dot-com crash, and if so, what are they?
FP: There are number of lessons that investors, CEOs, Wall Street, and the media have learned. One is that having a visionary technology guru is not enough. You need an experienced CEO who has successfully run a profit-and-loss operation to run these dot-com companies. The visionaries, the young technology geniuses, are absolutely critical because they provide vision, ideas, and creativity, but that is simply not enough. You need an experienced CEO to run a company.

Another lesson is that the Internet is not a product unto itself. It is a tool. It is perhaps the most sophisticated tool that the business community has experienced in decades, but a tool all the same. It ought to be viewed as a useful device for maximizing an already profitable operation. The counter to that is obvious; the Internet was seen as the product itself by a lot of these dot-com companies, and that was a mistake.

Investors learned that you need to use the traditional ways of valuing companies. Investors, and therefore the market, forgot about valuations where you look at current earnings and results and revenues as opposed to future earnings or potential earnings. For some reason, both investors and the market divorced themselves from the very traditional notions of value and focused on things like hits and bits and eyeballs, which were not producing any revenues.

I think there is a silver lining here, especially for small, minority business people who currently run businesses that are profitable, that do have earnings, that do have consistent revenue streams. Now a lot of investors that have been bloodied by misjudgments in the dot-com investment world are looking for these traditional or old-economy companies.

HB: Which business sectors do you expect to see catch fire over the next five years?
FP: I think the areas people should look to in the next five years are those products and services that cater to my generation, the baby-boom or the near-retirement baby-boom generation. That is going to be an extraordinary market, and consumer-based for certain products and services. This baby-boom generation is living longer, is more active, and continues to work, but bodies are starting to fall apart, so products in the health-care area and creative recreational enterprises that respond to this active group will be growing.

Over the next five years, technology that more efficiently uses natural resources is going to be successful. We know about fuel cells and energy-efficient appliances. But Iím also talking about new technologies that allow, for example, the electric utility sector to build more effective and robust transmission lines that require less maintenance or easier construction. This is a promising area. Another subset are those technologies that make travel in congested metropolitan areas more efficient Ė for example, in-vehicle navigation devices that you are beginning to see in some of the U.S. automakersí vehicles, and hands-free communication devices.

HB: What are the most pressing challenges facing todayís entrepreneurs?
FP: Without a doubt, the ability to make quick decisions, to be nimble, to be able to refocus your business in response to new competition. If weíve learned anything because of technology, competition, and the globalization of almost every sector of the economy, it is that you have to be fast. If youíre big and slow, youíre going to lose. If youíre small, nimble, and fast, youíre going to win. Thatís the first challenge Ė structuring your company so you have early-warning systems that give you information about trends, competition, and new technologies, then having the ability to take that information, integrate it into your business, and respond quickly.

Second is the need to both recruit and retain talented workers. Entrepreneurs are going to have to come up with more creative incentives to keep young workers.

The third thing is the ability to compete against very large, multinational corporations. Whether itís the auto sector, energy, telecom, banking, insurance Ė almost every sector of the economy is globalized.

HB: The VC market has cooled significantly in the past year. What are the implications for small and middle-market firms in need of investment capital?
FP: Entrepreneurs are going to have to be much more knowledgeable and comfortable with new kinds of financing. Going to the bank is not enough anymore. Thatís why you saw the consortium of manufacturers recently change the affirmative action definition to allow for private equity investors to have a position in minority companies. The whole movement of encouraging entrepreneurs to look at new forms of financing, either venture capital or private equity financing, to grow and compete in a world where everybody else is on a global scale, is going to be a challenge for entrepreneurs.

Venture capitalists are being more cautious, but a good company is a good company. A good management team is a good management team. If you have a good management team, if you have a good business plan, if you have a good vision for growth, if you have an effective strategy, if you have something unique about your product, you will find capital. It will come to you and you will be able to get it. But you have to position yourself in such a way to be able to access that capital.

HB: How is technology changing the process of obtaining capital?
FP: Technology allows capital to flow instantly across borders in ways that people never thought was possible. You have the opening of markets that allow for financial institutions to do business in Asia and Europe, and European financial institutions to do business in the United States. There are European insurance companies that have billions of dollars under management that can buy U.S. companies. These companies have to invest someplace. Technology is going to allow them to make those investments very easily from wherever they are.

HB: A recent study shows that minority-owned businesses havenít made much progress in obtaining federal contracts over the last 10 years. What do you think needs to be done?
FP: You need the executive of that government to make it very clear to the entire governmental organization that doing business with small and minority-owned companies is a priority.

The second thing that has to happen is that a lot of the government contracts have to be broken down. They are simply too large. The government has to make the effort to break down these contracts into bite sizes so minority-owned companies can compete.

The third thing the government can do as an option to breaking down those contracts is to tell large companies to form joint ventures with minority businesses so they come in as a team.

HB: What do you think of the Bush administrationís approach to the California energy crisis? How will small businesses be affected?
FP: My only judgment is that the administration has been inexcusably neglectful of the energy crisis in California. It took a while for the administration to understand that the economy of California is vital to the economy of the country. If the economy of California suffers significantly, the nationís economy will suffer, too. Someone didnít make that connection quickly enough. Thatís a huge state. When something like this hits a big state in such a huge way, with billions of dollars in lost revenue to consumers or the government, thatís a crisis. I donít think that the Bush administration acted quickly enough.

My second observation is that the reaction, when it did happen, was unimaginative. There was no thinking outside of the box to really deal with the crisis. Thatís how you deal with a crisis; you throw away all the old rules.

The third observation I would make is that had this been the state of Florida with this kind of energy crisis, I can tell you what would have happened. President Bush would have sent a hit squad of his best people to Florida immediately from every department in the government that had anything to do with the energy crisis. He would have been out there sooner, and they would have been working day-to-day with the government of Florida to resolve the crisis.

We have investments among California companies, and itís something they worry about. If you have a small manufacturing organization, you will be less able to withstand a blackout than a large company. If you are a small vendor and all of a sudden your energy bills have gone up 300 percent, thatís going to hit you harder than a large company.

Source: HISPANIC BUSINESS magazine

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