Money Buzz 12/03

The state of VC investments in minority-owned firms, the rising cost of audits and accounting, and more
Magazine Contributor
4 min read

This story appears in the December 2003 issue of Entrepreneur. Subscribe »

Minority Rule
VC investments in minority-owned firms, often considered charitable or public relations endeavors, actually realize competitive yields and similar risk levels as those made in mainstream ventures. So says the recently released Minorities and Venture Capital, an in-depth study of 24 funds.

"The results suggest that based on levels of returns and risk, [minority venture] entrepreneurs should be able to seek mainstream financing," says William Bradford, professor of finance and business economics at the University of Washington, Seattle, who partnered with Timothy Bates, professor of economics at Detroit's Wayne State University, to conduct the study. "For the decade ending in 2000, mainstream VC firms earned rates of return averaging 20 percent-just less than the 24 percent average return for the 117 investments made [in minority companies] by participating firms."

Minorities funded by VC firms that take a hands-on approach with their portfolio firms fared better than others, the study found. "To the extent you have funding choices, get a sense of what a fund will do for you in addition to financing," says Bradford, who suggests seeking VC firms that provide advice on strategic management, too.

Audit Angst
Don't be surprised if this year's tab for auditing and accounting services takes your breath away. Thanks to financial certification requirements laid out by the Sarbanes-Oxley Act of 2002, many companies are seeing double-digit and, in some cases, triple-digit hikes in external audit and accounting service fees.

Public companies- by Section 404 of the act to establish and maintain internal controls to ensure proper financial reporting and have an outside auditor assess the effectiveness of those controls- see the largest price jumps. But Arthur Andersen's demise has bred hypervigilance throughout the auditing and accounting community, which means private businesses are also likely to see a spike in fees, says David Cornelius, vice president of financial service solutions at Costa Mesa, California-based financial consulting firm FileNet Corp. "There's a squeeze on resources," says Cornelius, who notes that companies can minimize the impact by doing as much of the procedural legwork as possible in-house. "One way to contain accounting and auditing costs is to clearly document policies about issues that have a material influence on financial statements, such as procedures [used to] recognize revenue or account for assets."

Time for a Checkup?
Looked at your life insurance policy lately? Or better yet, had someone else review it? If you're like most insurance policy holders, probably not. But now's a good time to dig out that policy, because the same stock market collapse that sent many 401(k) and pension plans tumbling is having a similarly dire effect on the value of investment-backed variable life insurance policies.

"Policies are falling apart," says Sid Friedman, president and CEO of Philadelphia-based financial planning firm Corporate Financial Services. He explains that the variable policies popular during the market boom used strong investment return assumptions or "credit rates" intended to offset premium payments and enable policy holders to buy more insurance at reasonable rates. But instead of realizing the projected investment returns, the market tumbled, and policies took hits of as much as 50 percent, leaving them drastically underfunded. "Even with the market recovering, it will take a 100 percent increase to get those policies back to where they started from, much less where they should be given the original projected returns," explains Friedman. For policy holders, that means a premium hike of as much as 40 percent-or accepting that the policy will run out of cash decades shy of the original term.

What can investors do to ward off the hike? "Have someone other than the agent who sold you the policy review it; you may not even know what you've got," says Friedman, who notes that variable insurance policy holders may want to consider trading in their old policies for new ones in a tax-free exchange. "There may be alternatives where you can exchange your old policy for one based on new, lower assumptions that's more reactive to the market."

of consumers pay at least one bill online.
SOURCE: InsightExpress

Holiday sales are expected to increase
this year to about
SOURCE: National Retail Federation

of small-business owners expect an increase in their company revenues over the next year.
SOURCE: Wells Fargo/Gallup Small Business Index

Jennifer Pellet is a freelance writer in New York City specializing in business and finance.

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