Carlos Garcia would like to take his Hispanic research company to the next level, an effort that may well be helped by securing venture or equity financing. The money to do what he’d like is tempting, but at the same time, the president of Garcia Research Associates, worries that he may have to give up control of the company he has nurtured from its inception, nor is he certain that he’s ready to look at his business with the kind of quantitative scrutiny required by venture funders. Just a few years ago, firms like Garcia’s would not even have the opportunity to consider these options. But he and others like him are increasingly facing these types of dilemmas. The growth of the Hispanic market has caught the eyes of venture and equity finance companies just as it has the business world in general. And with more Hispanics sitting on the boards of pension funds and other corporate investment groups, these groups are feeling pressure to make investments that more closely mirror the demographic makeup of the community. “The reason is simple,” said Victor Maruri, managing partner at Hispania Capital Partners, a $125 million venture fund that invests in companies that target the Hispanic market. “It’s a population that’s growing at eight times the national rate, so any group that provides goods and services to a group like that is a rapidly growing company.” There are still just a handful of venture or equity firms that target Hispanic-owned or targeted businesses, but their numbers are increasing as businesses owned by or those that target Hispanics grow. “We’re looking at about 10 transactions every quarter,” said Maruri, whose two-year-old fund has so far made five investments and already sold one. But if Hispanic businesses are attracting more attention from investors, they are also posing problems that are not typically found in the general markets. Many of these ethnic companies tend to be small, too small for many venture funders. Perhaps just as important, the market can be difficult to grasp for those with no previous experience. “We all invest in things that are familiar to us,” said Luis Nogales, managing partner at Nogales Investments, a Latino-run private investment company that specializes in small- to medium-sized businesses in all markets. “So if money is going to be invested in businesses owned by Hispanics or that target Hispanics, then those investors have to be comfortable with that space. If you look at it that way, there are probably very few private investment firms that have that expertise.” Nogales, former president of Univision, points out that there are several different Hispanic markets some targeted newly arrived immigrants, some that address Latinos who have become assimilated in varying degrees. “Unless you’re really familiar with the Hispanic market, it’s difficult to make heads or tails of it,” he said. At first blush, it may look to outsiders that there are numerous thriving Hispanic businesses for investment firms to plumb. But closer inspection reveals that many are so small, they do not make financial sense for venture capitalists. Most of the large venture firms are looking for opportunities to invest $50 million or more in a deal. Even small firms are not likely to invest in companies with revenues less than $10 million or $15 million. “If you look at the list of businesses, 99 percent of them are mom and pop,” said Nogales. “It’s a guy that’s got two corner grocery stores and whose overall revenues are $300,000.” Then there is the problem of returns with these businesses. Most are too small to generate the 20 percent returns and more that venture capital companies require. Some venture capitalists have begun to look at ways to aggregate several of these small businesses to create a company with enough critical mass to generate high rates of returns, but the strategy can be tricky. Venture capitalists typically make decisions based on the company’s management as much as its business, and they risk losing the very talent they bought into with these types of moves. Data gathered by Hispanic Business magazine points up the difficulty small firms still have in securing venture or equity funding. According to the magazine a mere 3 percent of the companies on its Hispanic Business 500 list have used venture capital and only 2.6 percent have used private equity funding. But among the large companies on the list, that percentage increased to 13.3 percent. Even as these Hispanic businesses grow larger though, some say there are impediments to moving into venture financing. These investors require a track record of revenue growth and earnings growth, opportunities for cost cutting and other measures typically used by publicly-held corporations. “An an entrepreneur you don’t make decisions that way,” said Garcia. “We’re getting new space, getting new people, getting new technology, everything we’re doing is for down the road. If we were to go to any venture capital company or strategic investors who are going to use standard, classic evaluation methods, we have to think in those terms.” Garcia, who has thus far financed his company from his own pocket and the firm’s internally generated revenues, understands that deeper pockets could push the pace of growth that much farther, perhaps providing the opportunity to establish a national presence and compete more ably with other national companies . That’s why he keeps having discussions with venture firms, he said. But he’s also acutely aware that if he makes an investment deal, he will have to adapt his management style to his investors, a change he’s not certain he’s willing to make. “My guess is in the Hispanic world, they’re going to find these entrepreneurs are a bit more emotional, and they’re making decisions for reasons that are not entirely monetary,” Garcia said. “This is their stake. This is their piece of the world. This is what they’ve built.”
