NEW YORK – Deciding that it’s not practical to try and compete with the giants of the venture capital world, a handful of VC firms have eschewed multi-sector late-stage investing for a more defined niche: early-stage companies owned or managed by women or minorities.
“We think it is an underserved market and that there are many wonderful businesses led by women that are in great need of capital,” said Susan Posen, a co-founder of New York-based Diva Capital, which recently launched its inaugural fund-raising efforts.
According to the National Foundation for Women’s Business Owners, 40% of businesses in the U.S. are women-owned and are being started at double the national rate of any other group. However, historically less that 5% of VC money goes into them.
Diva’s concept is to give women-owned businesses seed funding of around $2 million, with hopes that the boost will then allow the businesses to access funds from traditional VC institutions. Diva, which got the approval from the Small Business Investment company but has not received money from it yet, has raised $10 million to date from high-net-worth individuals. To date, no institutional limited partners have signed on, although Diva would be happy to have them.
Perhaps traditional LPs are weary of coming on board because they feel that such companies’ social agenda override their need to yield high returns.
Daryl Wash, a co-founder of Ascend Ventures Group LLC, a N.Y.-based venture firm founded last January by four African-Americans that invests in minority and women-owned businesses, said his firm has landed some institutional investors but has also run into the similar problems as Diva Capital.
“We have some good dialogue going but haven’t gotten more commitments. It is a function of the market and when people see investment management teams like ours it is limiting. They don’t always realize we are financially driven. Some VCs invest in biotech firms or academic institutions; all we are doing is differentiating ourselves.
“Why would we ever invest in anything but the companies with the highest returns? We are in this to make money,” Wash said.
The venture firm has raised $40 million and is attempting to raise an additional $35 million before year-end.
Institutional investors that have participated thus far include the New York State Common Retirement Fund, Fairview Capital Partners, clients of Progress Investment Management Co., Bank of America and Fleet Development Ventures.
Ascend plans to put $1 million to $2 million into eight to 12 early-stage companies, mostly in the New York area. If the initial investments prove successful, Ascend will put an additional $4 million to $7 million into each company during follow-on funding.
Similarly, North Texas Opportunity Fund (NTOF), a Dallas-based vehicle that will fund minority- and women-owned businesses as well as businesses willing to relocate to the lower economic areas of North Texas, expects to make investments between $2 million to $5 million. The company’s fund closed on June 1, in excess of $28 million.
Axxon Capital, a Boston-based VC said that funds women- and minority-owned business, said they have had very good reception. However, like Diva, much of the fund’s capital, was raised through a government agency. In Axxon’s case the firm was licensed as a Small Business Investment company which makes it eligible to leverage up to twice its private capital through the SBA.
The company’s fund closed with a total of $53 million, with $17 million coming from private investors. The fund has signed on John Hancock Financial Services, State Street Bank and the Massachusetts Transportation Authority Pension Plan as LPs.
Echoing Darryl Wash’s thoughts, Paula Groves, a co-founder of Axxon, said, “It is very clear we see the profit opportunities and that is most important thing. No one would work in this field and not make money. The bottom line is, this sector has the highest rate of growth and lacks of capital.”