Jul. 16–More than a dozen years ago, California’s mammoth teachers’ retirement system invested a modest $7 million in Syncom Inc., a small Maryland venture capital fund specializing inminority-owned start-ups.
By the end of 2002, that investment generated a handsome $6.2 million profit for the 715,000-member California State Teachers’ Retirement System, the nation’s third largest pension fund.
CalSTRS isn’t the only investor that has reaped profits from minority-oriented VC funds.
A study released today by the Kansas City, Mo.-based Kaufman Foundation finds that VCs that invest in minority-owned companies produce solid financial returns rivaling traditional investments made by mainstream venture capitalists.
In analyzing returns from 117 investments by 24 minority-oriented VCs at the end of 2000, a pair of university researchers reported the average returns topped 20 percent.
That compared to a 17 percent return for the S&P 500 index and a 20.2 percent mark for more than 1,400 U.S. venture capital and buyout funds surveyed by the National Venture Capital Association. Researchers plan to conduct follow-up studies for subsequent years.
“The perception is there are not an acceptable level of good investments. This (study) says there is an acceptable level,” said William Bradford, a University of Washington professor, who co-authored the Kauffman report with Prof. Timothy Bates of Wayne State University in Michigan.
The report, commissioned by the business foundation, offers for the first time an investment analysis of the growing minority VC marketplace, which is dominated by mostly small funds. Researchers estimate there are more than 50 minority VCs manage nearly $2 billion in assets. That’s still a drop in the bucket in the overall multi-billion dollar VC universe.
“We set out to find out if minority-oriented venture capital investing was solid.” Bates said. “We found strong, preliminary evidence of a robust minority venture capital industry.”
Advocates say this niche VC market plays an important role providing minority entrepreneurs with the necessary capital to grow their business.
“It’s capital one can’t get anywhere else,” said Amador Bustos, former chief executive of the Z-Spanish Media Corp. in Sacramento. With start-up funding from Syncom, Bustos turned a single radio station into a small nationwide network of 32 owned and operated stations and 42 affiliates. Bustos later sold the network for $475 million.
Today, Bustos is an investor-manager in a new private equity firm that will invest in Latino businesses.
Sacramento entrepreneur Frank Washington also raises money for a VC fund aimed at minority-run ventures.
“Anytime you try to raise money it’s difficult. It’s doubly difficult for minority investors,” Washington said. “They have to prove that they’re for real.”
The Kauffman study found: The average investment per firm was $562,000 and generated an average net return of $1.1 million.
VCs didn’t suffer the ill effects from the dot-com bust because their investment portfolios were diversified in areas such as radio stations, retail, electronics manufacturing and service industries. In fact, the smaller funds are often were forced to form partnerships to finance a start-up. That provides additional eyes to evaluate a company and more management advice for the startup.
Public pension funds, including CalSTRS and the California Public Employees’ Retirement System, provided the largest source of capital: $55 million. But most of the those funds went to larger, more established VCs. The rest raised money from commercial banks and insurance companies as well as government programs, wealthy angel investors and foundations.
Kauffman officials hope the study will serve as a wake-up call for the investment community.
“We are trying to change the mindset,” said Rhonda Holman, a Kaufman Foundation vice president. “There is a lot more room for growth with funds being placed with these funds.”
Indeed, minority VCs have argued for years that investing in minority companies can be just as profitable as investing in their mainstream counterparts. They say the landscape has changed since the first VC minority funds started making social investments three decades ago.
“This is a marketplace that can deliver investment returns to its investors. We have been saying this for years,” said Laurence C. Morse, chairman of the National Association of Investment Companies, whose members participated in the study. The NAIC is an industry group representing investment firms that finance minority business ventures.
Duane McKnight, a general partner with Syncom, said some pension funds are recognizing that minority VCs can broaden their investment portfolios and generate new sources of returns.
“There are many more opportunities,” McKnight said.
Report author Bradford lauds pension funds like CalPERs for taking the lead in minority VCs’ investments. For instance, CalPERS invested $25 million in Opportunity Capital Partners, a Fremont-based minority-oriented VC.
And CalSTRS this year is searching for a manager to manage a $100 million portfolio that will invest in emerging VC and buyout funds.
“We’ve identified funds of this type as an exciting new area of opportunity and have created a strategy to capture returns by embracing diversity,” said Chris Ailman, chief investment officer at CalSTRS.
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(c) 2003, The Sacramento Bee, Calif. Distributed by Knight Ridder/Tribune Business News.
