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HELPING URBAN STARTUPS GET STARTED
It’s a common lament among small companies: The amount and type of financing entrepreneurs are able to raise seldom match what they actually need.
That’s especially true for startups that may not be quite ready to put a multimillion-dollar venture capital investment to work. “Our companies are looking for $500,000 to $1.5 million,” says Jose Corona, executive director of Inner City Advisors, an Oakland (Calif.) nonprofit that helps prepare small companies to win equity investments. “But funds are making minimum investments of $2 million to $3 million.” Other small companies would prefer debt, but in the current credit environment, they’re considering selling equity.
Now Corona and two other advocates for inner-city and minority-owned companies are tackling that problem. In a terrible fund-raising climate, they want to launch investment vehicles that will provide small amounts of early-stage equity, later-stage financing, and, in some cases, debt. “These funds will help companies get the financing that is right for them and not get pigeonholed by the first people who are interested,” says Deborah Shufrin, a senior vice-president at the nonprofit Initiative for a Competitive Inner City in Boston, which works to promote inner-city economic growth.
Corona aims to raise $25 million. Eugene Todd, a former investment banker, has a target of $40 million. Both will make initial investments of $500,000 to $1.5 million, and both will rely on nonprofits to help them find high-growth entrepreneurs. Corona’s fund will work with Inner City Advisors, while Todd is partnering with Cleveland’s JumpStart. JumpStart mentors about 80 companies, most of them technology-related, but CEO Ray Leach says that only 8 to 10 of them will typically find financing in a year. That leaves plenty of promising candidates for Todd’s fund, like Cleveland’s M.O.M. Tools, developer of a manfacturing tool that lasts six times as long as its competitors’. “They’re in the process of raising capital,” Leach says, “and they’ve struggled.”
Tim Ferguson, founder of Next Street Financial, a Roxbury (Mass.) financial advisory firm, is taking a different approach with his $100 million fund, which will provide slightly larger companies with $2 million to $5 million in debt-based financing. “In this particular space, there’s less interest in equity because people don’t want to give up control,” Ferguson says. Next Street will manage Ferguson’s fund and advise its portfolio companies.
Todd is looking to large banks to invest in his fund. Because getting that money can involve up to a year of due diligence, he’s also approaching local and regional banks and corporations “who know us, think this is a good thing, and have seen us in the community.” Todd has raised $7 million and will begin investing once he reaches $10 million–by March, he hopes. Corona is first approaching high-net-worth individuals and may later pitch to pension funds, banks, and foundations.
Working against them all is the perception that funds backing a social good–in this case, boosting inner-city and minority-owned companies with the potential to create jobs–aren’t profit-focused. Explains Corona: “Once you say you’re a social fund, everyone jumps into thinking you’re wasting their money.” Instead, “We’re telling [investors] we’re looking at inner-city companies as an emerging asset class. It won’t be market-rate, but we’ll give a good return on investment and a great social return.”
