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VALLEY BUSINESS | BIG DEALS FOR SMALL BUSINESS

Venture Capital Foray Causes Stir for Nonprofit

July 13, 1999|JEFFREY GETTLEMAN | TIMES STAFF WRITER

VAN NUYS — The deal seemed irresistible, a perfect venture capital opportunity that would generate money for the cash-strapped Valley Economic Development Center while opening a door to the lucrative private sector.

It started last fall with a phone call to U.S. Rep. Howard Berman from Century City attorney Les Gold, who was representing a wealthy Japanese investor seeking legal U.S. residency.

Berman (D-Mission Hills) knew that foreigners who invest $1 million in a U.S. company can get a green card under federal law. He referred Gold to the Valley Economic Development Center, a prominent nonprofit group that helps small businesses.

A few months later, VEDC president John Rooney helped cinch a deal in which the Japanese businessman invested $1.2 million in a Canoga Park sign maker, Signs 2000.

To Rooney, the deal marked yet another trailblazing achievement for the VEDC. But it also triggered turmoil within the organization, culminating in May with the VEDC board calling for Rooney to resign.

Rooney refused, sources say, and the board backed down.

Board spokesman Wayne Adelstein said last week the board has reviewed Rooney's performance and reaffirmed his authority.

Still, interviews with board members and others close to the organization reflect sharp divisions over Rooney's leadership and his handling of the Japanese deal.

Speaking privately, some board members said they are concerned 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 made hefty commissions on the Japanese deal at a time when the nonprofit is heavily in debt.

Of the $57,000 in fees generated by the deal, Rooney took a 10% cut, and Jim Jacobs, the VEDC consultant who helped negotiate with the investor, took 55%. That left only $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.

Rooney said commissions are common in venture capital deals. Jacobs, he added, was not a salaried staff member and paid only by commission.

As for his own cut, Rooney said such bonuses are included in his contract to encourage him to seek more private-sector work.

"Here we are, bringing $1.2 million to a local company in a depressed area," Rooney said. "I was so proud, I wanted to issue a press release."

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.

"It certainly reads like an unusual process and one that could be potentially problematic," Alvarado said. "But if it works, it's a good idea."

Board chairman David Honda refused comment, along with other directors, and deferred to Adelstein, a member of VEDC's finance committee.

Adelstein said the majority of the 17-member board supported the venture capital deal.

"You never know how secure government funding is," said Adelstein, who runs a community newspaper. "That's why we're looking for ways to diversify, and venture capital may be one direction we go in."

*

The VEDC has come a long way from when it started in 1976 with a budget of $2,363 and a mission to fix up the Van Nuys business district.

It's now a regional player in the small business community, a well-known, primarily government-financed organization with a $2.8-million budget, a $7-million loan fund, and projects stretching from La Puente to Compton to Ventura County. Its staff of 50 includes former entrepreneurs and several Ivy League-educated MBAs.

It was the 1994 Northridge earthquake that brought the VEDC to the big leagues. The 6.7-magnitude quake damaged thousands of businesses in the Valley and left them in desperate need of financial help.

Almost instantaneously the VEDC responded, hiring more staff, opening disaster centers and holding seminars at high school auditoriums across L.A. to teach businesspeople, en masse, how to apply for government loans.

The VEDC's annual budget nearly tripled in one year, from $800,000 in 1993 to $2.1-million in 1994. The city of Los Angeles, the city of Huntington Park, the U.S. Department of Commerce and the state all poured money into VEDC coffers.

At that point, the VEDC had no money of its own to lend and was strictly helping businesses apply for federal funds. But many of the businesses that were rejected by the Feds were important to the local economy, VEDC executives believed, and the organization searched for a way to help them.

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