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When Ricardo Cervantes and Alfredo Livas envisioned La Monarca Bakery in 2005, they knew they needed more than a dream to open their restaurant chain. They needed money.
But the two freshly-minted Stanford University Business School grads also knew their education pedigree wouldn’t open any bank vaults.
So they sought an angel—a dozen of them, actually—among former employers, colleagues and a close network of allies who would fund their Los Angeles start-up.“Bank financing wasn’t an option. We could have gone the traditional routes—max out the credit cards, get a second mortgage,” Cervantes says. “If you’re just starting out, if you don’t have a track record in your industry, banks aren’t interested. So you have to look elsewhere.”
It’s the paradox of small business. Entrepreneurs with a big dream and a business plan need financing to fuel their concepts. Yet while the economic recovery seems to be moving along in the banking sector, lending rules remain stringent and money can be scarce.
“Banks are more risk averse,” says Michael Lopez, president of Hispanic-Net.org, an association of high-end executives, investors and innovators. “The markets are tough and funding is tough.”
Fledgling entrepreneurs are left to seek alternative lenders. That’s where angel investors and venture capitalists come in. Angel investors are individuals or groups of affluent executives keen to fund business start-ups. Venture capitalists are firms or networks of wealthy investors who similarly fund small- to mid-sized businesses, usually at the start-up or early-growth stage. Each investor group typically seeks a stake in the enterprise, whether as ownership or convertible debt.
As with La Monarca, angels generally come along at an earlier stage, whether with “seed” funding to actually fuel the project’s launch, or at “Series A”—business-school speak for the next round of funding for a concept that’s more proven and farther along the growth chain.
Investor interest in the U.S. Hispanic space has surged as market numbers continue to grow, says Carlos Vassallo, founder and CEO of LatinVision Media Inc., a matchmaker of sorts that connects investors to Hispanic entrepreneurs, executives and others seeking funds.
The big news—Carlos Slim’s investment in The New York Times, or Brazilian Alexandre Behring’s role in the acquisition of Burger King in September—overshadows the role of the start-up, Vassallo says. But that does not mean it’s not out there.
“Investors are looking again. They are very picky about what and where to invest,” he says. “Hispanics firms can be small, but must be very profitable.”
Think your small business is venture ready? Follow these strategies to best align your financing needs with the expectations of the investment community.
[Look Far and Wide]When Cervantes and Livas went seeking investors, they cast their net among their existing network of family, friends and acquaintances. Usually, the net must be cast much wider, says Yolanda Ruiz, vice president with Pacific Community Ventures. The San Francisco private equity fund invests growth equity in small to medium businesses—generally up to $4 million into companies with between $5 million and $20 million in sales.
Remember, investors are looking for solid business plans, skilled management and strong investment opportunities—regardless of the target market or ownership’s ethnicity, she says.
“Investors want to invest because it’s a good company, not because it’s Hispanic or not,” Ruiz says. In fact, Hispanic cultural thinking often keeps small businesses out of the investment loop. They’re family enterprises, with an owner thinking more about the legacy, and “not thinking about whether they should sell this company or give control to anyone.”
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