STOCK QUOTES     More market data...

Venture capital: "Good ideas are good ideas"

By Tricia Duryee
Seattle Times Eastside business reporter

HARLEY SOLTES / THE SEATTLE TIMES Ezell Stephens, left, and Lewis Rudd have been best friends since they were children. They are renewing their push to make their restaurant, Ezell's Famous Chicken, a regional — or national — chain. Here they are in front of their restaurant on 23rd Avenue in Seattle's Central Area, one of three they own.

E-mail this article Print this article Search archive Most read articles Most e-mailed articles

After he checked out each city, he called his best friend, Lewis Rudd, who was serving in the Army, to give him the rundown. When he got to Seattle, he told Rudd the city was perfect. "They have banks here like they have gas stations back home," Stephens said. "They don't call it the Evergreen State because of its trees."

Rudd moved to Seattle in 1977 to help open the chicken shop, but it didn't take long for the two young men from small-town Texas to realize that money in the Evergreen State did not grow on trees. Five years passed between finding the right location — a building in the Central Area across from Garfield High School — and getting the $120,000 they needed to get started. It was another year before the restaurant opened.

More than two decades later, those memories are fresh as Stephens and Rudd try again to get money — this time to expand.

The plan is to take Ezell's Famous Chicken from its three locations into a regional and eventually national chain, competing against KFC and Popeyes. To get started, they say they need $1 million to open 10 stores around the Puget Sound region.

But raising money is tough for African-American business owners. In the past 40 years, more than 90 percent of venture capital has gone to white males, according to the Ewing Marion Kauffman Foundation, a Kansas City, Mo.-based institute that studies entrepreneurship.

Although the odds are against Ezell's, research has found that investors are missing good opportunities. The study, called "Minorities and Venture Capital," was conducted by professors at the University of Washington and Wayne State University and published by the Kauffman Foundation. Minority-owned firms produce returns comparable to the industry as a whole, the study found. And because fewer investors go after these opportunities, those who do get the best ones.

The group looked at investments in minority-owned businesses made by 24 funds from 1989 to 1995, according to UW business professor William Bradford. 11 of those funds — representing 117 investments — received an average of $1.62 million return on a $562,400 investment. The other funds' investments were too young to produce returns.

The internal rate of return, a measurement of a business's ability to generate cash that is used to compare investments (the higher the internal rate of return, the better the project), was 19.5 percent.

A healthy return Data include information as of 2001 from 11 funds nationally that made investments in 117 minority-owned firms from 1989 through 1995. Number of investments with positive payback: 64 Average investment: $562,400 Average gross return: $1,623,900 Average return on investment: $1,061,500

No direct comparison is available that takes into account investments with the same amount of risk, but Venture Economics keeps an index of the broader industry. It showed a 20.2 percent internal rate of return in the same period, the study said.

"This is seminal research," said Glenn Gregory, Ezell's chief financial officer and president of Obsidian Investment Advisors, a hedge fund he manages in Redmond. "It explodes the myth that people can't make money investing in minority-owned business."

State pension-fund interest

Some investors are beginning to realize the potential of this untapped resource. State pension funds, one of the largest contributors to venture-capital firms, are creating alternative-assets classes to designate funds for investing in minority-owned companies.

"We are calling out areas in the state that were underserved and had the ... potential for great returns," said Brad Pacheco, a spokesman for the California Public Employees' Retirement System, which manages pension and health benefits for more than 1.4 million government workers in the state.

Public pension funds have been the largest contributor to minority-investment funds, investing a median of $55 million, according to the report. The second-largest group invested a median of $15 million.

In Washington, however, no fund is designated for minority-owned companies.

"I can tell you that there are an awful lot of mainstream investors who have no idea that this is an issue, the fact that business owners of color have difficulty finding capital," said Victoria Kaplan, who once managed a fund for investing in minorities, specifically African-American, in Seattle.

Kaplan's fund, The Millennium Fund, was started in 1995 by a group of anonymous private investors. In six years, she invested $3.5 million in six minority-owned businesses, including a barbershop and a subcontractor. The fund made its final investment in 2001, and there are no plans to create another, she said.

"The Millennium Fund was about access to capital and networks," Kaplan said. "The investors did it as an experiment, and the experiment was over."

Investors had a couple of big losses and a couple of big wins, Kaplan said.

But without such funds, minorities find it difficult to raise money for their businesses. There are two primary reasons minority-owned companies don't attract a lot of investors, entrepreneurs and experts in the field say:

• Minorities typically don't have the social networks to introduce them to people who can give them money.

• They typically don't start high-tech companies, the type of business that has attracted the most money historically.

A favorite of Oprah's

	HARLEY SOLTES / THE SEATTLE TIMES Ezell Stephens, left, proclaims "I am that other 5 percent!" when recounting how the Small Business Administration warned him more than 20 years ago that 95 percent of all restaurants fail in six months. Stephens and Lewis Rudd, center, co-founded Ezell's Famous Chicken.

Ezell's Famous Chicken hasn't failed to get money for lack of trying. It took 20 years to get where it is today.

Oprah Winfrey loves the crispy chicken and soft, white sweet rolls. Ezell's has catered celebrity golf tournaments and served the Seahawks. Stephens has bigger plans, and they require a lot of capital — too much to make business loans an option.

The loans offered by the Small Business Administration are "just enough to get into trouble," Stephens said.

He speaks from experience. When he and Rudd opened a store in the University District, it was a disaster. First it was not doing well. Then after flying to Chicago to fry chicken up for Oprah's birthday, volume skyrocketed. The store had a hard time keeping up with demand, and the quality suffered. Many people didn't come back for more.

Ezell's financial situation worsened, and Stephens and Rudd would have filed for bankruptcy if the company had had the money to do it. But they hung in there. They closed the University District store, putting their dreams of expansion on hold indefinitely.

Eye on opportunities

The two feel the time has come. Over the past two years, they've reorganized the company to make it attractive for investors.

They added two outside board members — Mark Cicourel, the franchise owner of some Taco Del Mar restaurants, and Gregory. They cut the cost of goods, increased revenue (up 6 percent over projections) and completed a marketing survey.

That survey was key, they said. It found people were coming from all over the region to go to their restaurants in Rainier Valley, the Central Area and Lynnwood. It told them more people would buy their chicken if they had a store in their neighborhood.

"We feel it was a concentrated effort," Rudd said. "We feel [that] as a result, we are much better prepared today to take on outside investors and make it work."

The challenge still lies in attracting investors, something perhaps felt by many minorities.

Craig Dawson, owner of bill payer Retail Lockbox in Seattle, said it is extremely difficult to get business financing.

"Even for an African American who has great credit, owns his own building — and I own a bunch of real estate personally — I can't get favorable terms on a loan, which is crazy," Dawson said.

But, he said, it's not what you know, it's who you know.

Dawson is trying to change that by creating a network for minorities in Seattle. Called Tabor 100, the group was started as a network for African-American business owners and entrepreneurs in the Northwest.

Also, Dawson and Gregory have separately been working on trying to get the Washington State Investment Board to invest locally in nontechnology and nonbiotech funds that may invest in minority-owned firms.

Thomas Darden, an African-American venture capitalist in Chicago, said most investors give money to people they can relate to. If the investors are white, he said, they invest in businesses owned by white people.

"Under 2 percent ... of the total venture capital out there is being managed by ethnic minorities," said Darden, managing partner at Reliant Equity Investors. "That ... leads to fundamental problems."

Not investing in minority-owned companies is like using only 50 percent of your brain power, Darden said.

"Good ideas are good ideas," he said.

But the color of people's skin gets in the way, said Gregory, Ezell's CFO.

"Why is it that way?" Gregory said. "You get this group of — I'll call it what it is because I'm blunt — white men who are allocating capital and establishing where it's going to flow and what [the companies] are worth. Minority firms, manufacturing firms are considered worth less than the ones the cabal deems more valuable."

Making connections

The social network has been very much a factor for Ezell's.

Stephens and Rudd didn't know anyone who had enough money to invest in the company. But one day the company caught a break.

In 2003, while catering Lenny Wilkens' benefit golf tournament, Stephens was recognized for his community service. In the crowd that night was Walter Schoenfeld, one of the six original owners of the Mariners. Afterward, he called Wilkens to see if he could set up a meeting with Stephens and Rudd.

Schoenfeld eventually set up other meetings, connecting Rudd and Stephens with Maveron, an investment company in town started by Howard Schultz, chairman of Starbucks. They were finally part of the network.

But they didn't get any money. The timing wasn't right. Schoenfeld was the one with the drive and passion. The investment professionals to whom he introduced Stephens and Rudd didn't share that intensity to close the deal, Stephens said.

Rudd and Stephens say they believe that the doors are still open when the timing is right.

Even if the money doesn't come around, Rudd, 49, and Stephens, 51, said they will expand. As two black men, they say they can't wait around for others, or it might never happen.

"This way when we get it, it will be extra," Rudd said. "If the help comes, it will come as a surprise."

In the meantime, to keep themselves from banging their heads against the wall, each has a saying to keep his spirits up.

Rudd: "Ezell's success is by choice, not by chance."

Stephens: "You can only slow me down. You can't stop me."

Tricia Duryee: 206-464-3283 or tduryee@seattletimes.com

Copyright © 2004 The Seattle Times Company

E-mail this article

Print this article

Search archive

More business & technology headlines...