Deal Sparks Business Aid Group Turmoil
The Valley Economic Development Center has been praised by politicians and executives citywide for turning around thousands of small businesses and helping rejuvenate down-and-out commercial areas from Ventura to Compton.
But the nonprofit organization, which is headquartered in Van Nuys, is trying to recover from a recent controversy in which it brokered a $1.2-million investment from a Tokyo investor in a small business in Canoga Park. Although tempers have cooled, some VEDC board members had demanded the resignation of VEDC President John Rooney.
The deal triggered criticism that the investment was beyond the mission of the organization and that Rooney and a consultant had personally received too large a portion of the fees created by the equity investment.
Like many other business aid groups, Rooney had been seeking to get more private investment flowing through VEDC. It would not only help wean the organization off government contracts that have accounted for the bulk of its funding, but help provide new funding sources for local business.
“Here we are, bringing $1.2 million to a local company in a depressed area,” Rooney said of the Japanese deal. “I was so proud I wanted to issue a press release.”
The controversy began last fall, when an attorney for the wealthy Japanese investor called U.S. Rep. Howard L. Berman (D-Mission Hills), looking for a company seeking investment capital. Under federal law, foreigners who invest $1 million or more in a U.S. company can get a green card.
Berman steered the lawyer and his client to the VEDC. In April, Rooney helped cinch a deal in which the foreigner, identified only as a businessman from Tokyo, invested $1.2 million into Signs 2000 of Canoga Park.
Some VEDC board members, speaking privately, criticized the deal on grounds that venture capital-style investments are beyond the mission of the VEDC and the skill of its staff.
Others were alarmed that Rooney and a VEDC consultant collected hefty commissions from the deal--at a time when the nonprofit is heavily in debt.
Of the $57,000 in fees generated by the equity placement, Rooney took a 10% cut and Jim Jacobs, the VEDC consultant who helped negotiate with the investor, took 55%, Rooney said.
That left $20,000 for the agency, which as of last week owed its creditors $185,000.
“The board was incensed to pay such big commissions when the organization needs money so badly,” said one person with knowledge of the situation.
In the wake of the deal, the executive committee of the VEDC board asked Rooney to resign. But Rooney resisted, and he was allowed to remain.
Board spokesman Wayne Adelstein said board members reviewed Rooney’s performance and reaffirmed his authority.
Still, interviews with board members and others say there are still sharp divisions within the organization and the board over Rooney’s leadership.
Two board members, Leroy Chase, president of the San Fernando Valley Boys and Girls Club, and Lee Alpert, an Encino attorney, resigned last month. Chase said he quit to spend more time on other projects. Alpert could not be reached for comment.
Two other board members said they plan to resign because of the infighting and controversies at the VEDC.
In an effort to placate critics, Rooney, 38, said he will give up some of his commissions, reducing his annual compensation from about $135,000 to $120,000.
But such commissions, Rooney noted, are common in venture capital deals and were included in his contract to encourage him to seek more private sector work.
Even so, the practice came as a surprise to VEDC allies like Berman.
“I had no idea. I thought the VEDC was here to promote economic development, and I assumed their people were salaried,” Berman said.
The congressman also questioned why Rooney was paid a commission.
“He didn’t find the investor,” Berman said. “I did.”
Alberto Alvarado, head of the local office of the Small Business Administration, said few nonprofits pay commissions to staff.
Board Chairman David Honda refused to comment, along with other directors, and deferred to board spokesman Adelstein. Adelstein said the majority of the 17-member board supported the venture capital deal.
The Japanese venture capital deal underscores some of the challenges the VEDC faces as it tries to shift its focus from government grants to the private sector. The VEDC gets 90% of its $2.8-million annual budget from the city of Los Angeles and the state and federal governments.
The organization, formed in 1976, staffs several small business assistance centers, provides loans and runs entrepreneur training programs across the city. For the past several years, the VEDC has been searching for ways to decrease its dependence on grants because it fears they may soon dry up.
One of Rooney’s ideas is to start a VEDC venture capital fund that would support promising local entrepreneurs by becoming partners with them. If successful, the fund would generate handsome consulting fees and equity profits. The fund would be incorporated separately as a for-profit entity, Rooney said, and its income would help pay for VEDC programs.
But venture capital is notoriously risky and a lot less formulaic than making loans.
“It’s a very different business than loans,” said Kerwin Tesdell, president of the Alliance. “It requires a high level of financial expertise and a lot of money.”
The VEDC has neither, some board members told The Times. The staff, which includes several entrepreneurs and Ivy League educated MBAs, may be great at helping mom-and-pop businesses, but it is not qualified to dabble in high-stakes venture capital, these board members said.
But Rooney insists that venture capital is the right course for the VEDC, and he is adamant that he will remain at the helm.
A former consultant who specialized in minority businesses, Rooney said he wants to take advantage of the economy’s momentum and VEDC’s track record to build up small businesses across L.A.
“I want to stay here, I plan to stay here, I love this work,” he said, adding, “No doubt that there’s a lot that’s exciting for us to do. But obviously not everyone wants to go there.”
