New Venture Capital Firm Targets Minority Entrepreneurs
In the 12 years that Gregory B. Boyd spent working in corporate lending departments at banks in California and Texas, his employers helped finance only one minority business. Now, as a principal of a new Los Angeles venture capital fund, Boyd hopes to improve the odds for cash-strapped minority entrepreneurs.
Backed with $500,000 in seed money from Lynwood-based Economic Resources Corp., a nonprofit economic development corporation that has been instrumental in developing an industrial park near Watts, Boyd, 35, and his partners, Kenneth T. Lombard and Lance Drummond, hope to raise $25 million from pension funds and corporations to launch the ERC Capital Fund Ventures Partnership next month.
Theirs would be the first organized fund west of the Mississippi to raise private money to buy a stake in minority businesses in hopes of turning a profit. The three say they are particularly interested in financing minority-run companies in manufacturing, telecommunications and real estate development.
“Our job is to get minorities launched in significant businesses of significant magnitude in a wide range of industries where we feel there is some upside,” Boyd said. “The problem has been that capital has not been available. And we say to our investors, ‘Here’s a way to satisfy social concerns and also make money.’ ”
Historically, minority entrepreneurs have had to rely on banks or special government programs, such as Minority Enterprise Small Business Investment Corporations, or MESBICs, for financing. But with huge public pension funds starting to earmark some of their assets for affirmative action and with Southern California’s reputation as a hotbed of entrepreneurship, Boyd said he is convinced that ERC is perfectly positioned to be a force in the competitive venture capital field.
But others say the three will face formidable odds in pursuing their agenda in the venture capital business, a maturing industry that in its early years helped launch such well-known companies as Federal Express and MCI Communications Corp. Today, some 650 venture capital firms across the nation manage about $30 billion, according to Venture Capital Journal, a trade magazine. But as money has flooded in, returns have fallen. And lately big investors have turned skittish.
“Venture capital financing has become much less popular in recent years and downright unpopular in some circles,” said Burton J. McMurtry, past chairman of the National Venture Capital Assn. and a general partner of the venture capital firm Technology Venture Investors in Menlo Park. “It’s least popular among big institutional investors who threw a lot of money at the venture capital industry in the early 1980s, when it was at its peak. Now that returns are down, they’re pulling their money out.”
Unfortunately, the industry’s past largess did not greatly benefit minority firms, said Gavin M. Chen, a senior economist with the Commerce Department’s Minority Business Development Agency. Chen said black, Latino and Asian-owned firms received less than 5% of the equity financing provided by venture capitalists in 1982, the latest year for which figures are available. And he speculated that the percentages haven’t changed significantly since then.
Two other privately managed minority venture capital funds founded several years ago--UNC Partners in Boston and Syndicated Communications in Washington--have made some inroads, financing dozens of minority businesses. But ERC’s venture fund could face significant resistance in raising money because it hasn’t built a track record.
“We would not hire (invest with) anybody without experience,” said William O. Bell, the chief investment official at Florida’s state pension plan. Although Bell said Florida is trying to seek more opportunities to place a portion of its $15 billion in pension funds with minority money managers, he gives only to those who have operated for at least three years. Other money managers require at least 10 years of experience.
Rules Limited Scope
With offices in a 52-acre industrial park near Watts, the ERC Venture Capital Partnership seems an unlikely outpost for training venture capitalists. But Drummond, the 60-year-old chairman of the nonprofit Economic Resources Corp., said he believes that ERC’s previous experience in arranging corporate debt financing as well as real estate development and leveraged buyouts will persuade investors that ERC is up to the task of managing tens of millions of dollars.
Drummond, Boyd and Lombard say their most important investment experience has come from operating ERC’s Capital Fund, which lends money to minority businesses at fixed rates. Capitalized in 1984 at $1.7 million from federal government sources and a Ford Foundation grant, the fund has lent nearly $2.4 million to 13 minority businesses. They include Royal Entertainment Inc., which operates the Baldwin Theater, and Medialink VAR Corp., a black-owned telecommunications firm.
The fund has also helped syndicate an additional $10.5 million in loans to various minority businesses, including a $4.8-million loan package that enabled black entrepreneur James W. Norton to engineer a leveraged buyout of Argon Industries, a Los Angeles-based manufacturer of plastic products.
The Capital Fund, however, operates under government and Ford Foundation rules that limit its scope and size, and therefore did not take equity positions in companies it financed.
Yet ERC’s banker, Barry W. Uzel, president of the National Bank of California who has worked with Drummond and Boyd for years, contends that “the skills learned (from debt financing) are more or less transferable to venture capital.” He said he endorses ERC’s move into the venture capital field.
Drummond, a native of New York, developed his reputation as a successful businessman in the 1970s, when he headed his own broadcast investment firm and a liquor wholesale business which, at its peak in 1978, grossed $23 million and ranked among the top 10 largest black businesses in the United States.
Times Have Changed
Since joining ERC six years ago as a director, Drummond has guided ERC’s real estate division through its most active period of growth, including the construction of the Martin Luther King Shopping Center in Watts and the Century Terrace Condominiums.
He will be assisted in managing the fund by Lombard, a former regional director of the Los Angeles brokerage firm Grubb & Ellis, and by Boyd, who has held assistant vice president posts in the corporate financing divisions of Lloyd’s Bank of California and First National Bank of Chicago’s offices in Houston.
“This is not 1965 anymore,” said Drummond. “The government is cutting back on all different kinds of aid. If we want to play in the mainstream, we have to play where the mainstream is being played, venture financing. Unfortunately the MESBIC program has not been the great success that everybody wanted . . . . It’s young guys like these (Boyd and Lombard) that are the best hope for our future.”