New breed of venture capitalists targets minorities.

They use innovative means to discover prospects

L.A. COUNTY - A new breed of venture capital firm has been sprouting up around the Southland over the past two years.

Headed by Latinos, Asians and African Americans, this new generation of venture capital companies is taking advantage of a growing interest among institutional investors in L.A.'s minority-owned businesses. At the same time, however, many of these new venture capital finns have had to rely on less-conventional, more-innovative approaches to fund some of the county's promising young minority-owned companies.

Institutional investors' recent interest in minority-owned businesses is being driven by two major factors, according to industry sources.

Most importantly, the volume of institutional venture capital in the United States has grown steadily in the last two years, as the country has picked up economic steam. And as the volume of capital grows, institutional investors are being forced to seek out new markets - such as minority-owned businesses - in which to invest their venture capital dollars, sources said.

On a more local level, many of California's largest institutional investors recently have come under pressure to invest more heavily in their home state. In particular, the California Public Employees Retirement System has been making a strong effort in recent years to place more of its $96.9 billion investment portfolio in California-based companies, including local minority-owned businesses, according to industry sources.

One of L.A.'s first Hispanic-run venture capital firms to specialize in minority-owned business investment is Century City-based Bastion Capital Corp.

The firm's two founding partners, Danny Villanueva and Guillermo Bron, set up Bastion in 1989 and assembled a $125-million fund over the ensuing three and a half years.

Since then, the partners have been investigating numerous minority-owned prospects in which to invest.

Bastion's fund was assembled from such institutional giants as CalPERS, New York State Common Retirement Fund, Pacific Telesis Group. Wells Fargo Bank and the Pennsylvania Public School Employees' Retirement System.

As part of their mission, Villanueva and Bron agreed to invest at least 50 percent of their fund in minority-owned companies or companies that serve minority communities.

"We were convinced and we convinced our partners that the minority segment was underserved and overlooked. (Investment in minority firms) represented an opportunity, because it hadn't attracted the attention of the major funds before," said Villanueva.

Bastion has only invested in one firm to date, placing $20 million in Spanish-language communications firm Telemundo. Bastion is also close to signing two more deals, according to Villanueva.

Creative financing 

Funding minority-owned businesses may represent a good opportunity for institutional investors, but it also requires venture capitalists to take some innovative approaches to financing, according to industry sources.

Downtown L.A.-based Pine Cobble Partners started out three years ago trying to be a venture capital fund serving the minority-owned business community. But in the course of putting together its first fund, the firm's African-American principals discovered that traditional venture capital funding was not what minority-owned businesses needed most, according to Pine Cobble President and CEO Don Perry.

"These are not the kind of companies that are going to expand at 40-percent (annual) growth rates and go public in five years," said Perry.

He explained that many minority-owned firms in need of venture-style funding are not the traditional high-tech, biotech and retail companies usually sought by venture capitalists.

Instead, many minority-owned firms in need of funding are engaged in services, including temporary employment services, landscaping services and "consulting services of every stripe," said Perry.

"These (minority-owned) companies really have only one major asset - their receivables. So we built a company that helps provide financing based on that," said Perry.

The average recipient of Pine Cobble funding requires much less money than the traditional high-growth venture capital recipient, according to Perry.

"(The companies we fund) are small, very small. Our typical client has between $5,000 and $50,000 in monthly financing requirements," he said.

Despite the higher risk of working with smaller minority-owned firms, Pine Cobble has shown that the segment can still be very profitable, according to Perry. "In the last two years, we've had 3,700 financial transactions with 48 companies for $33 million," he said.

New generation

A firm similar to Bastion and Pine Cobble is Fulcrum Venture Capital Corp., which was founded in Washington, D.C., in 1977 and moved to Culver City in 1992.

But while Bastion focuses on deals in the $5 million-to-$25 million range, and Pine Cobble focuses on the $5,000-to-$50,000 range, Fulcrum's deals are somewhere in between - usually in the $250,000-to-$500,000 range, according to company President Brian Argrett.

Argrett, an African American, explained that a new generation of minority business people has emerged in L.A. in recent years, and they are drawing both attention and dollars from institutional investors.

"There's an increase in the number of minority entrepreneurs that have been in corporate America for some years and advanced up the corporate ladder," he said, explaining that many of these entrepreneurs are now going out and opening their own businesses.

Institutional investors see firms such as Pine Cobble, Bastion and Fulcrum as vehicles to tap into niche markets they might otherwise be unable to reach, explained Tony Thomas, an investment analyst at the Southern California Edison Co. Retirement Plan.

The Edison retirement plan made its first commitment to a venture fund targeting minority-owned businesses in 1990 and has invested about $37 million of its private equity commitments in similar funds since then, according to Thomas.

"We are always looking for good opportunities," said Thomas, adding that Edison has invested in four funds targeting minority-owned businesses to date.