A Good Place to Be an Entrepreneur

A Good Place to Be an Entrepreneur

California continues
improving its business environment by focusing on entrepreneurial
concerns and what the state can do to help.

By Jim Casparie / Entrepreneur.com

updated 8:00 a.m. PT, Fri., Nov. 30, 2007

As a native Californian, if it weren’t for my extensive travels
around the country and the world, I would never appreciate how
truly special the environment here is for entrepreneurs. Adding to
my appreciation is the nature of my business–assisting
entrepreneurs in finding the best route to their success.

I was especially impressed when I learned that the California
Legislature was asking leaders in the community for their input on
making the entrepreneurial environment even better. In addition to
selecting me to join this august body, they also recruited senior
members of several VC firms, investment banks and commercial banks,
and the major pension funds, whose dollars play a part in
supporting more than 300 VC firms, as well as professors from some
of the leading universities promoting entrepreneurism.

The initial objectives of the group were listed as:

 

  • Assisting communities in becoming investment ready;
  • Expanding debt instruments to serve the business development
    needs of emerging domestic markets;
  • Using public money to reduce community development risks in
    emerging domestic markets; and
  • Innovating private equity investment products in emerging
    domestic markets.

Since September, the group has met once in person and had two
two-hour long conference calls. Collectively, it has decided to
focus on the following three priorities:

  1. Enhance the financial literacy of and technical assistance
    available to entrepreneurs seeking debt and equity capital. In
    other words, focus on developing programs that help entrepreneurs
    better understand: how much money they might need to grow their
    company to the next level; and where to get that money.
  2. Develop one or more models for deploying private equity funding
    in early stage companies, including blending public and private
    resources to meet risk-adjusted return requirements. Here the focus
    would be on: developing a method to screen entrepreneurs to
    determine which ones are ready for funding and which ones still
    need help to qualify for funding; and providing systems and
    incentives to combine both public and private investment funds to
    increase their reach and effectiveness in helping
    entrepreneurs.
  3. Establish common definitions and criteria for use by investors
    in emerging domestic markets. For example, many entrepreneurs don’t
    understand, much less appreciate, many of the terms used by the
    professionals that will decide their fate. These terms include:
    "cap table," a chart that provides an investor with detailed
    information about who owns or has claim to every share of stock in
    the company; and "equity," which refers to a form of ownership in
    the company where money is exchanged for stock based on a unit of
    value that has been pre-agreed to by both parties.

Currently, there is no one place entrepreneurs can go to get
this type of information in either the quantity or quality they
need.

If you’d like to know more about this ongoing effort of the
Advisory Group, including a list of members, you can go to the
website for the California State Assembly Committee on Jobs,
Economic Development, and the Economy.

So what does this committee hope to accomplish? Since I know
there is usually a general amount of skepticism about what
government can do, let me emphasize some of the common concerns
driving this effort:

  • In the past 10 years, there has been a renewed interest by
    institutional investors in identifying businesses and real estate
    opportunities in emerging domestic markets. This growth in investor
    interest is driven, in part, by the recognition that changing
    demographics in the U.S have resulted in a significant increase in
    minority purchasing power and business development by
    minority-owned firms.
  • The IRS predicts that Latinos will soon own 10 percent of
    businesses. Overall growth rates in the number of minority-owned
    businesses are three to four times higher than for white-owned
    businesses.
  • Small businesses provide approximately 75 percent of net new
    jobs in the nation. In California, small businesses comprise more
    than 98 percent of all businesses, and businesses with less than
    five employees make up more than 88 percent of all businesses in
    the state.
  • Despite their growth, emerging domestic markets’ ability to
    grow is constrained by their access to capital. Even after
    accounting for a variety of factors, such as education, experience,
    industry and location, EDM firms receive less capital and on less
    advantageous terms. Latinos and blacks are turned down for business
    loans at 3 times the rate of whites with equivalent credit
    characteristics.
  • In 2006, private equity venture funds raised $130 billion;
    approximately $25.5 billion was invested in 3,416 deals. The
    composition of EDM venture portfolios differs from mainstream
    portfolios. EDM venture portfolios are typically comprised of
    retailers, financial and business service entities, makers and
    distributors of consumer products, and computer software
    companies.  These types of companies comprise only 10 percent
    of mainstream venture capital investments.
  • Although women own approximately 40 percent of all businesses
    in the U.S., they receive less than five percent of all venture
    capital.
  • Minority owners comprise 8 percent of all owner firms, with
    Hispanics owning close to 4 percent.  However, minority-owned
    firms receive less than 2 percent of venture capital.
  • Rural entrepreneurs account for 10 percent of all businesses
    but receive less than 2 percent of all venture capital.

Thus, the motivation lies in recognizing that the economic base
of California is changing and that the financial community needs to
make the appropriate adjustments. California’s leadership and
reputation for fostering entrepreneurism will be threatened if we
don’t adjust to these changes and learn how to better improve our
mechanisms for finding, helping and funding the best and brightest
ideas in our state–regardless of their source.

Jim Casparie is the "Raising Money"
coach
 at Entrepreneur.com and the founder and CEO
of
The Venture Alliance, a national firm
based in Irvine, California, that’s dedicated to getting companies
funded.
 

Copyright © 2007 Entrepreneur.com, Inc.
 
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