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SPECIAL REPORT: SMALL-BUSINESS FINANCING : ENTERPRISE
ZONE: Lessons and Insight on Southland Businesses

Equity Seen as Aid to Urban Ills

May 26, 1999|LEE ROMNEY | TIMES STAFF WRITER

Jorge Ramirez is a trailblazer. But if the buzz sweeping the country is to be believed, what he accomplished with 18 months of frenzied networking and nail-biting negotiation will soon come more easily to the nation's minority entrepreneurs.

Ramirez, president of Integrated Circuit Development Co., pulled together a crucial cocktail of equity capital and bank debt to buy out his employer and propel his Montrose company--a manufacturer of pure heating systems for computer chip makers--to the next level.

Finding $1.2 million in equity financing from investors was a near-miracle, Ramirez said. But equity for entrepreneurs like him and others in more distressed areas has become the latest highly touted solution to the nation's urban poverty problem, promoted as the key to success for tens of thousands of businesses that fall below the radar of traditional venture capitalists.

The argument goes like this: Minority entrepreneurs have launched businesses at record rates--many in neighborhoods plagued by double-digit unemployment. But without equity capital, they are destined to stay small. If investors would look beyond high-growth industries to these underserved "new markets," they would discover a gold mine of untapped returns while helping to close the country's stubborn wealth gap.

"The strong economy provides the vehicle and opportunity to finally invest in these places and try to bring them up," said Housing and Urban Development Secretary Andrew Cuomo, whose America's Private Investment Companies (APIC) initiative is part of a Clinton administration plan to leverage $6 billion in equity capital for underserved areas.

In addition to the Clinton plan--which awaits congressional approval--state Treasurer Phil Angelides and the Greenlining Institute are urging the state's pension funds to shift some equity investments from risky foreign markets to underserved communities at home, and an Assembly bill would require similar investments from the insurance industry. Community development groups are also raising equity funds to bolster businesses that have gotten by on burdensome debt alone. Even Federal Reserve Chairman Alan Greenspan has weighed in on the issue.

"It's almost a mantra now, that what's missing is equity capital," said Nick Smith, chairman of the New York-based Community Development Venture Capital Alliance, which has seen the number of community-based equity funds balloon to 45 from less than 10 five years ago.

Finding Equity Isn't the Only Challenge

But behind all the buzz lies a mountain of challenges that must be surmounted.

Less than 2% of the venture capital in the country is controlled by minority-run funds that are combing minority communities for investments, according to a recent Milken Institute report.

Many minority-owned firms that would be good candidates for funding, moreover, are not plugged in to the networks of high-powered bankers, attorneys and accountants that can make deals happen and provide the skills crucial to success.

And funds with a community development focus generally face geographic restrictions, high costs and difficulty raising money from the institutional investors that contribute heavily elsewhere.

Most agree that equity capital is a necessary tool for the burgeoning class of underserved businesses. But what has been lost in the dialogue is the complexity of getting it to them.

"Where are you going to find these companies?" asked Jill Dominguez, now a private consultant with Irvine-based WRJ Group who helped Ramirez pull his deal together. "I look for minority [entrepreneurs] because that's what I've chosen to do, but I have a hell of a time finding them. . . . Equity financing is not going to make all the difference unless you get the serious technical assistance to go with it."

Apart from traditional venture capital from professionally managed funds, entrepreneurs can scramble--as Ramirez did--for individual "angel" investors or partners. Whatever the form, equity financing involves ceding some ownership or control of the business, which many entrepreneurs are loath to do.

Proponents of greater access to equity say it is crucial because it adds value to companies and can be used to leverage debt. While any form will do, most of the efforts underway call for equity capital to come through professionally managed funds.

But for equity financing to make a dent on the scale promised by the Clinton administration and other boosters, a new model is required, experts said, in which investors count some of their earnings in social returns.

"We're talking about . . . investing in people who can provide solid returns but are not going to provide EBay-type returns," said Jerry Carrington, general partner in Illinois-based Inroads Capital Partners, whose deals include financing for women- and minority-owned businesses.

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