An increasingly healthy venture capital market is providing growing opportunities for middle-market, and even early-stage, Hispanic companies looking for funds. But venture capital and private equity investors warn that the bar remains high for firms to prove their worth amid an increasingly competitive landscape.
Burned by the dot-com crash that saw many companies – and investments – evaporate, today's venture capital financing, say many industry experts, shows more rational pricing in line with conditions and practices. Nearly 2,900 deals were struck totaling $20.9 billion last year, according to the National Venture Capital Association. And according to Dow Jones VentureSource data, first-round valuations have held steady around $5 million, with second-round valuations just under $15 million, since the last quarter of 2003. In contrast, first-round valuations in 2000 exceeded $10 million, according to the data.
"It's a good time to be an entrepreneur," says Tracy Lefteroff, global managing partner of the VC practice at PricewaterhouseCoopers. "New ideas with realistic business models will be seriously considered. New companies with customer commitments can get cash to progress. And operating companies can access plenty of capital to accelerate growth. The watchwords for entrepreneurs are potential, prudence, and patience."
The National Venture Capital Association, which represents about 450 venture capital and private equity firms, predicts this year will be marked by a return to early-stage investing as new funds are raised. But the shift also means a return to "stealth mode" as VCs look to capitalize on first-to-market advances for their funds and investors search for true breakthrough innovations while avoiding "me too" deals.
Technology is expected to continue to be the cornerstone of VC investing this year, with an ongoing focus on software and the life sciences. New areas drawing attention include energy, clean technology, and financial services. And Hispanic-owned companies also stand to gain.
"I think there are great opportunities for Hispanic-led businesses, but only if they're good companies," says Howard Ross, a partner in Philadelphia-based private equity firm LLR Partners. "Any company, Hispanic or otherwise, that is growing and has some differentiated aspect to it so it can become, or is, a leader in its niche can attract capital."
And while minority-owned businesses remain largely underfunded by venture capitalists – only 1.5 percent of private-equity capital goes to minority companies, according to the National Association of Investors Corp. – Mr. Ross and others believe Hispanic-owned companies now have a significant opportunity to attract investors.
"There is significant capital sitting in VC and private equity funds that is waiting to be invested," he says. "The industry over the past five years has raised record amounts of money, and a lot of that money is unspent and waiting for good opportunities."
To tap such funds, experts say entrepreneurs need to assess and emphasize their strengths. For example, established companies will want to stress such things as a tenured management team, says Carlos Signoret of Hispania Capital Partners, a private equity firm in Chicago. "The most important thing we look for is a management team that understands the business they're in," Mr. Signoret says. "[One that has] been working together for some period of time and … been able to manage successfully a business that is generating profits, and ideally … has reached the point where they need to get to the next level of growth and they're constrained by capital."
New, small, and family-owned enterprises can emphasize strong growth potential. Mr. Ross, for example, looks for candidates pursuing a market large enough to support revenue growth of $100 million or more. He considers whether the company's product or service is different or better than what's already on the market and whether barriers to entry are significant enough to discourage potential competitors.
Talbert Navia, head of the private equity group for New York-based law firm Chadbourne & Parke, suggests companies succinctly articulate how the new capital would fit into their business plan. A company's growth strategy must be simple and clear, with supportable projections. Mr. Navia adds that investors also must be convinced the company will be attractive to future potential buyers to ensure an exit strategy.
Richard Geller, co-founder of the private equity investment firm Sponsera in McClean, Virginia, says investors want to see their exit strategy built into a business plan. "An exit today means that you plan to be acquired by an existing company, so make sure you have a list of big companies who would want to snap you up," he says.
Generating excitement about your company and its future is essential, according to Stephen P. Crane, Philadelphia leader of the emerging and growth markets practice for Ernst & Young. "A presentation that drones on indicates to the savvy investor that you are unsophisticated when it comes to the rules of engagement," says Mr. Crane, who was also chairman of the 2004 Mid-Atlantic Venture Conference. "It also tells your audience that you have doubts as to what information is critical. On the other hand, if your presentation is too brief, you give investors the impression that you are unwilling to share important information."
Effective presentations include realistic financial statements and operating milestones, says Mr. Crane, who also suggests officials rehearse possible questions and answers investors could pose after the formal presentation, and use audiovisuals and handouts to help investors follow the presentation.
Prompt follow-ups are key, adds Mr. Crane, who says some in the investment community will test business owners to see how long it takes them to make contact following the presentation.
Ultimately, perseverance will be crucial as more capital flows into Hispanic-owned companies in recognition of the demographic's growing buying power, says Willie Dennis, partner and co-chair of the venture capital/private equity practice group at the law firm of Thelen Reid & Priest in New York.
"You're looking at entities that are trying to figure out ways to tap into them and develop a relationship and an investment vehicle that can take advantage of something that is expected to grow at a phenomenal rate," Mr. Dennis says. "We will see significant capital being deployed in those areas as time goes on."
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