Venture Capital Fad Is Costing Urban, Non-Tech Businesses Dearly
Infatuation with the ever-upward stock market has spawned an almost religious belief in venture capital and angels as the ultimate business solution. As detailed in our section today, VC firms are being encouraged to start up funds in urban areas and to focus on women, minority-owned, urban and rural businesses. The federal government is stepping in to help create these new entities with various tax breaks and incentives.
Meanwhile, California recently loosened regulations to allow VC firms to sign on more investors, a measure geared to fund smaller start-ups. And the state Legislature is considering creation of the California Seed Capital and Early Stage Corp. Fund. Sponsored by Susan Davis (D-San Diego), the bill, AB 482, would allow tax credits for investors and fund more start-ups.
Yet, to hear venture capital pitched as the remedy for social and economic imbalances is a little like listening to the “greed is good” speech of Gordon Gekko, the fictional takeover king in the movie “Wall Street.”
The truth is, venture capital is part of the larger financial system that, for the most part, ignores minority-owned, urban, non-tech and service companies. Indeed, VC can be said to even help create the very inequities that these new venture funds are now supposed to turn around and remedy. Its appearance today as a tool for social change may be little more than business faddishness.
Business fads come and go. Each one promises to remake the business universe and deliver results. For example, TQM, or total quality management, was the hot ticket a few years ago, but rates only a tepid “oh yeah” of recognition these days. Diversity training and diversity consultants were ushered in the ‘90s until they were, for the most part, ushered out by anti-affirmative action attitudes.
Today, venture capital rules as the hottest funding mechanism, carrying along with it a necessity to rethink the entire business model. Entrepreneurs are encouraged to drop notions of steady growth and sole ownership and change them to dreams of rapid expansion via partnerships and acquisition. In return, growth beyond an entrepreneur’s dream of success awaits. But is it all a dream?
Take a look at what gets funded. Money is going to high-tech, specifically Internet, companies that go public with stock superheated by day traders and by online purchasers. These companies don’t even have to turn a profit to get VC money because the zooming stock price increases take care of that. Venture capitalists are happy to fund these companies because they return three to five times their investment within five years in deals starting at $25 million and going up to $100 million.
Now, take a look at the companies starting up in urban areas by immigrants, minorities and women. They include service-oriented concerns such as day-care centers or office-cleaning companies; unique arts-and-crafts or clothing companies; a handful of manufacturers; construction companies; and food processors. Typically, these are slow-growth, basic companies, non-glitzy, non-connected to Westside and Northern California venture-capital types.
These companies have struggled for years even to get bankers to offer them traditional loans. In fact, bankers have had to be bused through East Los Angeles and Watts so that they could get to know the communities. Are we now going to tell these business owners that they should turn their efforts toward the even more difficult task of finding venture capital? Will we soon see VC types squeezed into buses and cruising the same streets in these neighborhoods?
Though there’s plenty of talk about minority- and women-owned technology companies, the reality is, simply, that’s not the reality in many urban areas. These places might be better served by better education, technology training and basic employment years before VC even enters the picture.
Though it’s laudable to try to create VC-fundable companies, as Zone Ventures and FAME Renaissance are doing, and even though kudos should be given to investors who willingly take lower returns, a basic question must be asked.
Why so much emphasis on venture capital? Apart from faddishness, there may be another reason for the turn toward what the Clinton administration calls “new markets” and what the Republicans call “historically underutilized business zones,” or HUBZones.
That reason is that the political muscle and wherewithal to provide direct assistance has dried up. Affirmative action stands discredited, outreach efforts to women-owned and minority-owned businesses have been dismantled in many California state agencies, and the money spent on past government-sponsored redevelopment programs is perceived as wasted taxpayer funds. Such programs to small businesses are considered government giveaways. Yet, large corporations continue to be courted by cities eager to give them huge tax breaks or discounted land in return for big-time development deals.
The push for VC for “new market” firms is, in part, the higher-income version of welfare-to-work programs. This country believes so much in the dream of individualism and pull-yourself-up-by-your-bootstraps that it doesn’t want to recognize that there is indeed economic fallout in terms of people, neighborhoods and businesses.
Rather than dedicate time and energy to creating innovative programs to heal and revamp our ailing urban centers, we prefer to view them as seedbeds for profit. Rather than simply teaching people to fish, as in the Biblical parable, we now want a percentage of their take. Rather than recognizing that the profit motive isn’t always the solution, we want to apply it everywhere, which has led us to television commercials in grade schools and product-oriented research in universities.
We don’t owe anyone anything anymore, which is why venture capital is such a great solution. Because then the people on the bottom, the people needing help, end up owing us. They owe us their businesses and their profits and it all works out for everyone.
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Times staff writer Vicki Torres can be reached at (213) 237-6553 or at vicki.torres@latimes.com.
