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So Close, Yet...

It may seem like the Internet is everyone's formula for success, but are minorities being left out of the equation?

The Internet has been hyped as the great equalizer for minority entrepreneurs, and in one respect, that's true: Anyone can set up shop in cyberspace and, as long as the product does what it should, buyers don't care what ethnicity the seller is.

But when it comes to growing an Internet business, the picture gets murkier. Are ethnic minority entrepreneurs tasting some of the dot.com pie?

Some are; some aren't. ShopNow.com, a cybermall created by African American entrepreneur Dwayne Walker has obtained $95 million in venture and private financing. NetNoir Inc., an African American portal co-founded by E. David Ellington, raised more than $10 million in venture capital; and BET.com closed $35 million in equity investments for a planned Afro-centric portal.

And StarMedia, under the leadership of founder and CEO Fernando Espuelas and president Jack Chen, secured $80 million in private equity financing. But these companies seem to be exceptions rather than the rule.

"The key to getting a foothold on the Internet is capital. But the process of getting capital is the problem," explains Charles A. Sheffield, who is a co-founder of Carthage Partners, a tech-focused venture fund in New York City.

Michael Batie, founder of SuccessNet, an African American-owned ISP in Los Angeles, knows. "I go out and talk to people in the [African American] community about money and they say they're not making any," explains the Los Angeles entrepreneur. "I go to other folks, and I don't know why they're not giving me money," says Batie, adding that his office mate, Latino ISP AztecaNet, is having similar problems.

Derrick Collins, a partner of Chicago-based Polestar Capital Partners, puts it this way: "The larger community understands there's money to be made in ethnic communities, but not everyone understands there are certain segments within those communities you can target."

Darien Dash of DME Media Interactive Holdings, a New York City advanced technology provider, went to three major venture capitalists looking for $9 million in 1998. But he didn't like what he heard.

"Some wanted to finance it as debt and some wanted to take a majority equity position," recalls Dash, who decided such requests didn't fit his long-term vision. Instead, he took over an existing public company in a reverse merger and raised funds by selling stock.

One problem is that, many times, securing venture capital is all about tapping connections. "A tremendous number of minorities start Internet companies, but do they understand the [venture capital] game? We invest in people, the management team," explains Fritz Jordan, co-founder of VCapitol.com. "Minorities [often] don't have the backgrounds VCs look for."

Availability of funds is another part of the problem, says Duane McKnight, a principal with Syncom Funds. Minorities control a miniscule percentage of available capital; consequently, minority firms get less than 1 percent of venture investments.

But Latino techpreneurs are beginning to change that picture. "U.S. Hispanics are being recognized as a potent purchasing segment," points out Sandro Trosso of the Latino venture fund Explorador.net. "This market has $340 billion purchasing power, second only to Portugal." When combined with the entirety of Latin America's 500 million potential users, the pie has become simply too sweet to resist.

Bottom line, those minorities who succeed will have to be determined and creative enough to do so despite the investment community's benign neglect.

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This article was originally published in the April 2000 print edition of Entrepreneur with the headline: So Close, Yet....

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