Creating a little synergy: Black alliance creates venture capital fund for minorities in telecommunications

Black Enterprise, May, 1996 by Joyce Jones

Synergy has become a siren song among the major players in the media and telecommunications industries. Last year bore witness to a sizable number of mergers and acquisitions as giants became industry mammoths. But so far, the "S" word has eluded minority entrepreneurs who lack both the capital to compete and the critical relationships often required to form lucrative partnerships.

Minorities control less than 1% of investment and ownership in telecommunications businesses. On top of that, they faced major setbacks last year with the repeal of the tax certificate and the Adarand vs. Pena decision.

To help remedy this situation, three African American-owned firms have formed an alliance to provide advisory services, venture capital funds and private equity funds to minority entrepreneurs in telecommunications: The joint venture is between Bandwidth Consulting Inc., Pryor, McClendon, Counts & Co. (PMC) and Ark Capital Management.

"The venture is timely for a number of reasons that all add up to tremendous opportunity," says Christopher Bell, founder of Chicago-based Bandwidth Consulting. For one thing, deregulation, he explains, provides a free-for-all business atmosphere, enabling entrepreneurs to enter and compete in various areas. In fact, the threesome have a pending $200 million bid to acquire AT&T Paradyne, a multimedia products division that is being spun off by AT&T. Corporate downsizing is another factor in its favor. "There is experienced, very strong talent coming out of major companies every day," says Xcylur Stoakley, a principal at Ark Capital Management in Chicago. "All they need is a finance team to make it happen."

The trio is also looking to help minority entrepreneurs form strategic partnerships, something they don't do often enough, says Philadelphia-based PMC principal Raymond McClendon. "A small company that has a good idea or product can align itself with a major player and generate a significant opportunity. Large, majority firms," he adds, "may be interested in partnering with minority firms. But they will not take the time to beat the bushes, as we will, to find those diamonds in the rough."

Potential candidates must present a solid business plan, demonstrating a strong management team and a return on investment of around 30% to 40%; they must also show a competitive or unfair advantage in the marketplace. In turn, funds will be administered in the form of equity, with investments likely tO be in the area of $1 million and up.

Of particular interest are substantial deals such as the one put together by Maceo K. Sloan, chairman, CEO and president of the Sloan Financial Group. In November of 1994, his PCS Development Corp. (PCSD) was awarded by the Federal Communications Commission with five of the hotly contested personal communications service licenses. The $92 million deal allows PCSD to service a national wireless network.

The venture capital fund was established in the wake of the recently passed telecommunications bill, which will affect telephone and cable television businesses as well as companies in cyberspace. Although the new law is seen as strongly favoring big business, a section specifically designed to aid small businesses is the creation of the Telecommunications Development Fund. It will provide financing to help small businesses expand and compete in the marketplace, says Rep. Ed Towns (D-N.Y.), who introduced legislation creating the fund. It will require escrow deposits received by the FCC during licensing auctions to be placed in an interest-bearing account. The interest from such deposits will be used to establish the fund. The money, in turn, will be used to provide access to capital for small businesses (under $50 million in revenues) by making low-interest loans, investments or other extensions of credit.

The fund, says Rep. Towns, will promote the public interest through a diversity of ownership and hasten the delivery of services to underserved urban and rural areas.