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Nearly two decades after the founding of J. H. Whitney & Co. and Venrock, the first minority venture funds began to take root, due to a government initiative known as the Minority Enterprise Small Business Investment Company Act. Administered by the Small Business Administration, these funds were tightly regulated and could never match the passion and the creativity of the mainstream funds they had been designed to emulate. It was left to pioneers such as Herbert P. Wilkins, Sr., to work within the system to better focus the investment direction of such funds and expand the number of minority-owned and managed venture capital firms. Wilkins also sought to expand the pool of capital available to minority-owned firms to include private equity from institutional investors in addition to SBA-supplied funds.
Richard Burnes, Jr., of Charles River Partners has suggested that until the mid-1980s, venture capital was a gentleman's club. For most African-Americans, it was a club that, by design or by neglect, ignored them. For Wilkins, a child of Boston's Roxbury neighborhood and a graduate of the Harvard Business School, the neglect rankled. But instead of taking flight to another profession, he started his own venture capital fund directed at minority-owned businesses. At a time when most similar funds were just providers of debt — with a little bit of equity sprinkled in — Wilkins focused on building a minority fund that specialized in telecommunications. At that time, most minority venture capital firms resembled the old SBICs: they were more providers of debt than equity because the financing provided by the SBA required regular payments of interest on the debt. And because these funds needed to generate income from day one to pay the SBA debt and cover operating expenses, the only investments these funds could make involved debt.
Wilkins's Syncom, based in Silver Spring, Maryland, isn't the largest venture capital fund directed at minorities — that would be Cleveland Christophe's TSG Ventures — but its pioneering effort and its investment strategy has become the blueprint for nearly all of the other funds operating in that space. Wilkins's entrepreneurial attitude toward venture capital has created a community that now manages well over $2 billion in capital.
| Raising Venture Capital |
| Urban National — A Minority Effort? |
| Syncom |
| Telecommunications |
| Cable Markets |
| A Level Playing Field |
In 1968 Harvard Business School opened up its application process and I decided that because I got accepted into the business school I would commit my life to minority small business. That may sound corny but that's what I set out to do. I would never work for a major corporation.
When I got to the Business School there was a fashionable debate going on about entrepreneurship. Up to that point the Business School had not offered small business as an option to graduates. But there were a number of people who were starting to look at what General Doriot had done.
I joined a club on entrepreneurship and small business and decided with a couple of other Black M.B.A. candidates that we should spend the summer of 1969 looking at raising a venture capital fund. We got together with Charlie Cabot, who was a lawyer with Sullivan & Wooster, and Peter Brooke, who acted as an informal advisor to the effort, and began fund-raising. We were able to convince Bache & Co. to help us raise $10 million for a venture capital fund. We found the process of raising the fund rewarding and began to get a feel for the new-business development potential venture capital offered over conventional banking. We were excited, as we had looked at a whole array of career opportunities and had focused on venture capital, a brand new industry, as a single career option. The process was both challenging and fascinating. We spent the month of July writing a placement memorandum. The idea was to start marketing the fund immediately. But the market went sour and Bache told us they would not be able to place the fund.
My partners, one of whom was a C.P.A., and I were interested in accounting and consulting. After graduation, we established a C.P.A. firm. And even though I wasn't a C.P.A. I joined as a principal and handled all management services engagements. Subsequently, the firm merged with a New York City-based C.P.A. firm. I moved from Boston to New York with firmwide responsibility for management services. Although I liked what I was doing, I knew that going into a venture capital partnership would be my only career choice.
Urban National — A Minority Effort?
At the time, another group was looking at the process of venture capital for minorities — a group called Urban National. I closely followed their efforts as they were planning to do exactly what we had wanted to do. They went to J. P. Morgan and Morgan Stanley and raised $10 million. I talked to the group about the possibility of joining them, and in 1973 they offered me a job as senior vice president and investment officer. At that point I had achieved my goal to be a senior investment officer in a venture capital firm.
Early on, I found out that the firm was extremely elitist, and the people at Morgan Stanley and J. P. Morgan who backed the fund had their own particular approach to investing and only wanted to fund their type of deals. I felt they were on the wrong track. They financed steel companies, clothing manufacturers, radio stations, franchise store operators — a lot of fairly good companies, but their approach to doing business didn't make sense to me. They weren't looking at anything entrepreneurial; instead, they wanted to back Black corporate managers. These were generally good managers but they were also people who lacked the vision to grow a company. They did not have the feel of the market or business opportunity and the dynamism of leadership that entrepreneurs bring to a deal.
Decisions about investing or reacting to changes in the portfolio businesses weren't made quickly. After two years I was really having problems with the entire investment approach in terms of the deals I was bringing to the company versus the deals they wanted to do. They were turning down deals in a very sarcastic fashion. And I realized there was a fundamental difference in the way I wanted to do things. I wanted to finance the people I had grown up with — people with clear vision about the future and where they wanted to go in business. I wanted to finance forceful, strong-willed, and extremely competitive people, like many of the people I grew up with in the projects of Boston — but ones who were my peers, and had gone on to college. The differences were so intense that I was terminated in February 1975, and that was probably the best thing that could have happened to me.
I went back to consulting and also worked on acquiring a beer franchise distributor, a deal that subsequently fell apart. But I had been talking to a group about running their new telecommunications venture fund and finally decided that I would take a crack at it. Started in February of 1977, Syncom had about $1.5 million in the bank. That was its total initial capitalization.
In coming on board with Syncom I decided to spend the first six to nine months developing a business plan that would focus on how to deploy our scarce capital and still achieve our investment objective of increasing minority ownership of telecommunications opportunities. We wanted to be in a situation where we would be considered a serious player in the financial arena and could attract some serious deal flow. Our initial intent was to focus exclusively on seed and early-stage companies that were minority-owned telecommunications enterprises.
Given our capital constraints, the business plan was probably as good a product as anyone could have done at that time. I thought I had a pretty fair understanding of what the venture capital profession was. Even with my differences at Urban National, I had really gained a lot of experience, especially from Courtney Whitin, Urban National's president, who was a former investment officer at American Research & Development Corporation (ARD). All through my trial by fire at Urban National I still considered Courtney Whitin a friend and mentor.
The first thing we did was to take the capital we had and put it into a 301(d) SBIC named SCI Media Corp., which we subsequently changed to Syncom Capital Corporation, a MESBIC. The MESBIC allowed us to leverage our capital four to one.
Our business plan was to focus on those services in telecommunications where we could get in at a relatively cheap price, grow values, and achieve capital gains. I began studying signal coverage maps of media properties across the country and decided that that the best opportunities were in developing and building newly issued FCC radio station broadcast licenses. These stations generally had less power but, properly engineered, gave good coverage of communities where there were large minority populations. I began to give presentations across the country, encouraging people to apply for licenses that we could finance.
We started with a plan for FM radio and we also developed an AM strategy as well. There were a number of heritage AM stations owned by Sonderling Broadcasting Corp. that were being sold off as these companies shifted to FM broadcast. Suddenly, we were financing AM stations all along the East Coast — from Boston down to South Carolina. The AM plan was a disaster, principally because AM was a declining service. The audience was moving from AM to FM faster than we had anticipated. By and large if you invested in AM back then you lost your investment. Fortunately we had so little capital, we didn't invest in too many stations, and our losses were held at manageable levels.
We also started investing in cable in urban markets. In 1978 I hired Terry Jones, who had been at the Booker T. Washington Foundation focusing on obtaining minority-owned cable franchises in major markets. We then set about this dual focus on AM-FM radio and cable in 1979 and 1980. By 1981 the number of cable franchises we financed had surpassed the number of radio deals. Still, there were questions as to whether we could ever get enough capital to make these investments work and whether we could find and develop the management talent to make these properties grow.
We realized early that plain old prejudice was sustaining a great disparity between the resources that were available to mainstream companies and to minority-owned radio and cable companies. Although in most markets there were no companies providing programming to the Black community, the existing stations still were able — through general market programming — to take most of the revenue. We had stations coming onstream in markets with large Black populations that were programming Black and were almost immediately able to go to the top of the market in ratings but could not generate any real revenue. So we had to figure out how to balance out the cost of quality programming and the lack of revenue.
I remember having a conversation with a lawyer who represented one of our radio stations in Oklahoma. I went to him and said, "Listen, we have a real problem. We're seventh in the market in terms of ratings in Oklahoma City but we're generating no revenues — our revenue is a measly $5,000 to $6,000 a month." I asked him to contact the right people and let them know of our plight. He came back after talking to some business owners and advertisers and said, "Your problem has not been completely solved but you should be able to do business." That's how we worked on closing the revenue gap in market after market.
It dawned on me that leveling the playing field had to be an essential part of every business plan if we were to make money. We could be very successful in getting properties, we could build a cable system, but we weren't going to get favorable pricing for financing construction of cable systems or anything that was necessary to be successful in any industry without tough hard fights and strong investor alliances to achieve a change.
How did we deal with it? We decided we would hang in there and explore cost alternatives — bring the cost down to match the revenues being generated. Most of these properties were run on a shoestring, but I don't think we lost a single investment. Then in 1984 the economy started taking off, and you could see the portfolio taking shape. It was solid. The years of patience and basic business strategy had begun to pay off.
Today Syncom Capital Corp. has retired all of its SBA debt, and has achieved a compounded 18 percent return over the past twenty-one years. Syncom's performance ranks it in the upper quartile of the venture capital industry based upon recent Venture Economics statistical data.
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