Fueling the growth of black companies - Countdown to 25

Black Enterprise, Nov, 1994 by Gracian Mack

In 1992, Horace Williams had had enough of slaving over a hot oven in one of Pizza Hut's South Carolina franchises. Williams, a 14-year Pizza Hut employee, wanted to come from behind he counter - and become an owner.

Turning that dream into reality takes cash, and a Pizza Hut salary just wasn't enough, no matter how you sliced it. So with two investing partners, a strategic business plan and $300,000 in cash, Williams began his search for capital. Even more important, Williams, team had a commitment from Pizza Hut's minority franchise development program to support their effort to buy 17 franchises in Greenville, S.C., and Atlanta.

Enter Renaissance Capital, an Atlanta-based Specialized Small Business Investment Corporation (SSBIC). Like the typical SSBIC, Renaissance is a private company licensed and funded in part by the Small Business Administration. Combined with cash from the private sector (which in the case of Renaissance translates into a consortium of major banks and corporations in the Atlanta area), SSBICs provide venture capital to minority enterprises.

"The success of KVI L.P., which is based in Atlanta [Williams' two-year-old company now boasts $10 million in annual sales] is like a fairy tale," says Anita Stephens, president of Renaissance Capital. "To start, we syndicated financing among six other SSBICs [formerly known as Minority Enterprise Small Business Investment Corporations or MESBICs], and in the first round raised $1.5 million from subordinated debt and equity sources. We raised another &5 million in bank financing, and just two years later we,re seeing gains from regular interest repayments," Stephens says triumphantly,

POTHOLES IN THE YELLOW

BRICK ROAD

Unfortunately, for most African-American entrepreneurs, happy endings like this are only found in fairy tales. Without a doubt, mining for venture capital is the No. I problem plaguing black small business hopefuls as they try to leverage experience and contacts to get their piece of the American pie.

Despite public and private initiatives such as the SSBIC program, black businessmen and women still face enormous obstacles in seeking out financing. Add this to the devastating cutbacks in government and corporate America and the problem only gets tougher to solve.

On one front, leveraged funding from the SBA is drying up due to congressional cutbacks. According to the latest SBA figures, government funding to the 94 currently active SSBICs has shown a steady decline from $348.9 million in 1991 to $290.2 million at the end of March last year.

On another front, the private sector continues to downsize, slicing investments to small business through its own venture capital subsidiaries in the process. SBA statistics reveal that corporate support to SSBICs has shown a reversal of fortunes from $473 million in 1988 to a high of $562 million in 1991 and back down to $470.4 million in 1994.

"Every day you read in the Wall Street Journal about how X amount in millions of dollars was raised for a company that you never heard of and don't understand their product, but nonetheless they are able to raise all this money. We need to be able to do that," says Henry Snead, executive director of a Minority Business Development Center in New Brunswick, N.J.

Galvanizing the venture capital community isn't the only obstacle the African-American businessperson faces. According to the cry heard in all quarters of black finance, major hurdles include:

* a "long hallway" of restrictions and qualifiers for participation in the small business assistance environment;

* a declining contributions to SSBICs from traditional SBA and corporate sources.

* a lack of support from a primary source of venture capital - institutional investors, like pension funds, insurance companies and private partnerships.

"If people could only realize that it makes good business sense to participate in the MESBIC programs," says Snead. "For one thing, most of the guys and gals these suppliers and vendors are hiring are from the local communities. That lowers the unemployment rate and stimulates all sorts of things like economic growth, individual savings and consumer spending."

Donald Lawhorne is president of Dallas-based MESBIC Ventures Holding Co., one of the largest SSBICs in the country with a diverse group of corporate shareholders including NationsBank, Sears Roebuck, Xerox and Mobil Oil. MESBIC Ventures has over $40 million in total assets. Lawhorne says the problem with both corporate and government investors is attributable to "a lack of political courage."

Lawhorne explains that even with tax Incentives given to private corporations, members of Congress still balk at the notion of making appropriations available to finance minority business.

"We're talking about driving minority entrepreneurship 100% through the Beltway," says Lawhorne. "You have congressmen and their constituents who will vote down an initiative if they just hear the word minority.' They begin to think to themselves, Minority! It's probably another program for a group of people who are going to take my job or my opportunity.' That,s ridiculous," Lawhorne concludes.