Jul. 18–Venture capital investments in minority-run businesses yield profits that are just as strong as industry averages, according to a new survey.
A group of 24 venture capital firms that invested in 117 minority companies during the 1990s reported they had received an average 20 percent annual financial return on those ventures. That’s about the same as the industry average, according to the survey conducted by the Kauffman Foundation, an educational group that focuses on entrepreneurship.
The 59-page report released Wednesday was based on work by Timothy Bates, a professor at Wayne State University in Detroit, and William Bradford, professor at the University of Washington in Seattle.
“We set out to find out if minority-oriented venture capital was solid,” Bates said. “We found strong preliminary evidence of a robust minority venture capital industry.”
Bradford said the returns also should reassure large institutional investors, who give money to venture capital firms, that minority businesses are worthy as investment targets. These large investors include large state public pension funds such as the California Public Employees’ Retirement System and the California State Teachers’ Retirement System.
Bates and Bradford were cautious in directly comparing investments in minority businesses with other mainstream businesses, in part because it is so difficult to obtain data that allows such comparisons.
Venture firms are notoriously secretive, and they each calculate their financial-return data using different measures. To simplify, the authors calculated the returns of the 117 minority businesses themselves, using a standard measurement called the “internal rate of return.”
They then compared that with a venture capital industry benchmark compiled by Venture Economics, a well-known venture research group, which also uses IRRs. This benchmark, the so-called Private Equity Performance Index, also showed a return of about 20 percent during the same time frame, according to the study.
One minority business included in the report was Z-Spanish Media, founded by entrepreneur Amador Bustos, who came to the United States from Mexico when he was 12. Z-Spanish Media was later sold to a public company, and Bustos, who grew up in Redwood City, went on to start another broadcast network, Bustos Media Holdings. The company owns San Jose radio station KZSJ 1120 AM, also known as Que Huong Radio, which serves the Vietnamese community.
Bustos said he couldn’t have launched his businesses without venture capital, and that the study is important because it is one of the first to show that investing in minority businesses isn’t as risky as some people have made it out to be.
It should encourage venture capitalists and others to invest in minority businesses because it makes business sense, he said, and not out of an obligation to affirmative action. “People have been overlooking the minority emerging market,” Bustos said. “This is a very viable, vibrant, safe and productive sector.”
The survey reported several other findings. It found that successful venture capital firms investing in minority businesses were more likely to show certain characteristics:
— The best venture firms tended to invest in diverse industries.
— They made investments averaging about $1 million a company.
— They took highly active roles in the affairs of portfolio companies.
— They weren’t particularly large.
— Finally, they didn’t accept funding from the federal government’s Small Business Administration program.
The last finding is noteworthy, because most venture firms that focus on minority businesses have their roots in the SBA program, the study noted. The SBA provides attractive loans to encourage investing in minority businesses.
However, those firms that kept taking money from the SBA tended to underperform, said Rhonda Holman, vice president of the Kauffman Foundation. The quicker the firms could outgrow their need for SBA funds, she said, the more likely they were to improve performance.
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