The U.S. Department of Commerce has begun a program to match minority businesses with venture capitalists looking for companies in which to invest.
The initiative is headed by the department's Minority Business Development Agency, which in a study last year found that minority entrepreneurs accounted for 2 percent of private capital equity investments.
Under the program, to coincide with the department's weeklong minority business conference in September, five businesses will get the chance to sell their business plans to venture capitalists.
Minority businesses often find it difficult to secure financing, and when they do it's usually through traditional bank loans. Equity investments -- in which an investor puts up money in exchange for an ownership stake in the company -- are better options because the risks of not having enough collateral to get a loan or of defaulting on a loan isn't as high, Commerce officials said.
Banks want collateral
"Principally, [minorities'] financing has been through bank financing, or a debt model rather than an equity model," said Ronald Langston, MBDA's national director. "The bank is going to want collateral. We may look good and smile, but a bank is still going to want to see what kind of collateral you have."
"An equity lender will say, `I like your idea. I like you. I see the potential in your investment so I'm going to put in a couple of million,'" Langston said.
The Commerce Department, at a cost of $200,000, has hired the Washington-based Emerging Venture Network to help minority businesses get a shot at venture capital.
The not-for-profit Emerging Venture has developed a competition open to minority businesses across the country. Through Aug. 2, the group will be accepting business plans through MBDA's five regional offices. The New York office will handle Maryland entries.
The 200 strongest plans will be evaluated on strengths, weaknesses and areas needing improvement. Twenty-five will then be selected to participate in a boot camp -- during the Commerce Department's National Minority Enterprise Development Week Conference in Washington from Sept. 24-27 -- where they'll learn how to pitch their plan to a venture capitalist. Five finalists will then be chosen to present their plans to venture capitalists.
Emerging Venture officials say they're giving minority businesses access to a financial world many know little about.
Venture capitalists operate in a fairly tight network," said James Moore, Emerging Venture's managing partner. "They don't look at unsolicited business plans. They do business on referrals. What's been missing for minorities is access to that network."
Moore said he had a conference call last week with several Prince George's minority businesses interested in competing in the program.
The Commerce Department decided to work with Emerging Venture after seeing its success with a similar program it did for AOL Time Warner Inc. Of the 16 small businesses that presented plans to venture capitalists under that program, six received investments.
Langston said he hopes to eventually expand the program.
"I'm hoping this project is such a success that I can make a business case that it's worth further funding," Langston said. "My hope is that minority business enterprises will learn how to position themselves in front of venture capitalists."