Note 1 African American applicants for small busi- ness financing are denied credit twice as often as Cau- casians with similar creditworthiness, according to the latest research. One key study by the National Bureau of Economic Research found raw loan denial rates of 27 percent for Caucasians and 66 percent for African Americans. “There’s evidence that the market isn’t work- ing properly,” says lead author David G. Blanchflower , chairman of the economics department at Dartmouth College in Hanover, New Hampshire.
Note 2 A new study from the Ewing Marion Kauffman Foundation provides the most detailed look to date at the connections between minority entrepreneurs and the ven- ture capital industry. The report examines funds operated by members of the National Association of Investment Companies (NAIC), an association of investment firms with interest in backing minority business enterprises ( MBEs ). A few interesting findings stand out. First, the growth in mi- nority enterprise venture financing has been rapid. In the early 1990s, only several million dollars had been in- vested in MBEs . Today the industry has more than $1 bil- lion under management. The researchers, Wayne State’s Timothy Bates and University of Washington’s William Bradford, also found that this sector is quite profitable. The average investment per firm was $562,000; the average net return on this investment exceeded $1 million. The aver- age rate of return exceeded 20 percent—compared to a 17 percent return for the S&P 500 over the same period. These funds also tend to invest in a wider mix of industrial sectors, thus cushioning the industry from some effects of the technology downturn. Overall, the authors conclude At the same time as the Mindspring deal, Wooten
was also courting Network Solutions, Inc., a company that nearly had a monopoly on dot-com (domain) names. Wooten believed that Network Solutions would be a perfect channel to deliver the ImageCafé product line. Millions of people went to Network Solutions “credit card in hand” to buy a domain name; the next natural step after obtaining a domain name was to build (or buy) a website. Because ImageCafé was a shopping experience and not a building experience, Network Solutions could attach ImageCafé to its pur- chase flow. As soon as a small business customer bought a domain name, the new company could also buy an ImageCafé website. The phrase “one-stop shop- ping” certainly came to mind. Wooten recalls, “It didn’t hurt their channel because most of their resellers of do- main names were ISPs. So here we could help them to reward their top resellers, by sending them hosting busi- ness from customers who had purchased ImageCafé websites.”
Wooten finally set a meeting with Network Solutions and quickly moved up the ranks to the company’s new CEO, Jim Rutt . Rutt loved ImageCafé and believed it was the perfect product extension for Network Solu- tions’ business.
Product on Track, But Out of Cash (OOC)
By June 1999 ImageCafé was again out of cash. Wooten had been working to arrange what he perceived as the perfect financing round for several months: He had three major investors who were interested in investing, two venture capital firms, and Network Solutions. Wooten was looking for a total investment of $3,000,000; he wanted $1,000,000 from each in- vestor, on a $10,000,000 valuation. One investor felt a $10,000,000 valuation was too high. As the nego- tiations dragged on, another of the three agreed to lend ImageCafé $150,000. Negotiations continued to drag because of the valuation. Wooten was even will- ing to sweeten the deal with $500,000 in warrants, split three ways.
In the middle of the valuation discussions, Network Solutions made a buyout offer. After brief but intense dis- cussions with Rutt , Wooten found himself with an offer that was potentially worth $21 million: one-third in cash, one-third in Network Solutions stock, and one-third in an earn-out. 16 Wooten owned a majority of ImageCafé , and
this offer would clearly mean a big payday. But there was a hitch. The last bridge loan Wooten had received from the venture capitalists had a 90-day “no shop” clause attached. Running out of cash, and unable to sell the company until September, Wooten went to a company
16 An earn-out is an arrangement in which sellers of a business receive
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that the minority venture capital investment sector is poised for further expansion. 17
Note 318 Earl G. Graves is considered the preemi-
nent authority in America on African American busi- ness. The locus of that authority is Black Enterprise , the magazine he founded in 1970, which now has a circu- lation of nearly 300,000 and revenues of $24 million. Graves is the magazine’s publisher as well as both the
president and chief executive officer of the parent com- pany, Earl G. Graves Ltd. He is also co-owner with Erving “Magic” Johnson of a Washington, D.C.–based Pepsi Cola distributorship, a firm that happens to be the largest minority-controlled Pepsi franchise in the nation. Johnson serves as chief executive officer of the Pepsi franchise. These two business ventures have propelled Graves into the ranks of elected board members of prestigious businesses and trustees of well-known foun- dations. He has become a leading spokesperson on issues that affect the well-being and economic success of African Americans. He has also used his expertise to educate others about trends and opportunities in African American entrepreneurship.
17 Please see the following for more information: “Minorities and Venture
Capital: A New Wave in American Business” by Timothy Bates and William Bradford, http://www.kauffman.org/pages/371.cfm.
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