Gina Gonzalez was struggling to raise two children on welfare, food stamps and a loan from her sister when the flier arrived at her Lowell apartment last summer. A new home health care company promised free training and, more surprising, jobs to all graduates. For the first time, the 25-year-old high school dropout, who worked as a hotel housekeeper until she was too far along in her pregnancy to dust or do laundry, thought maybe she would not have to go back to cleaning rooms.
“I was interested because they say, ‘No experience necessary’…I just wanted to try something instead of being a housekeeper all the time,” Gonzalez recalled months later. “I wanted to make a better life for my children.”
In four weeks, Gonzalez was certified as a home health aide and started working for Valley Home Care. Now her mother takes care of her kids while she treks around downtown Lowell and nearby Pawtucketville to care for elderly residents who no longer can bathe, dress or cook for themselves. Gonzalez earns $8 an hour, almost $2 an hour more than at the Sheraton hotel, and she brings home almost twice as much each month as she got from welfare and food stamps. She’s even even putting money aside, planning to fulfill a promise to take her 5-year-old daughter, Suny, to Disney World.
When Gonzalez thanks people, she thinks of her supervisors and supportive fellow workers. She doesn’t know about the nonprofit organization 20 miles away in Boston that helped make her new life possible. But every new company needs cash. And Valley Home Care could not have opened its doors without $100,000 from Boston Community Capital.
The 12-year-old community development group, best known for its support of affordable housing, is venturing into new territory by investing in small startup businesses that provide needed services and decent jobs in low-income neighborhoods in Eastern Massachusetts. So far, the organization’s new community-based venture fund has raised $2 million, financed four businesses and helped create nearly 200 entry-level positions. Most recently, the Boston Community Venture Fund committed $130,000 to City Fresh Foods, a Dorchester-based prepared food company owned by two brothers who want to expand.
DeWitt Jones, executive director of Boston Community Capital, the venture fund’s parent organization, hopes to have raised $5 million by August and to make 15 to 30 investments in the next few years. That could mean hundreds of new jobs, many for people now dependent on public assistance. If all goes well, the venture fund will see its first returns in the year 2000. Anything left after paying investors and covering expenses will be saved for future investments.
Filling the Gap
The concept of community development venture capital is gaining converts across the country as people working in low-income communities realize that many prospective businesses cannot find the crucial startup money they need. The entrepreneurs interested in these neighborhoods, usually of limited means themselves, have little collateral to qualify for loans. They don’t have wealthy family or friends to ask for money. And they cannot find traditional investors because the businesses are so risky.
“We think if we can fill the money gap there will be a lot of successful business,” says Jones, who launched the venture fund in 1996 after three years of research around the country. “We think you can have a significant impact on the economic dysfunction of poor communities.”
Along the way, Jones and his colleagues are breaking down the walls between the two very different worlds of community development and venture capital. Just about the only thing the fields have traditionally had in common, he says, is the belief that profits and social benefits cannot coexist. “When you’re talking about venture capital, everyone [in community development] thinks you’re trying to exploit people. When you’re talking with the venture capital side, everyone thinks you’re just throwing money away [on social causes],” Jones says.
But he is determined to prove that “there’s a world between being a rapacious investor and a fuzzy-headed do-gooder.” It’s not only O.K. — it’s key — for a business with a social mission to be profitable, because otherwise it can’t grow, Jones maintains. Profitability allows a business to serve more people and provide more jobs, at higher wages, with better benefits. And that helps the community as a whole, he says.
While traditional venture capitalists invest in companies that they believe will make them a huge amount of money very quickly, sometimes as much as 100 times what they put in, the Boston Community Venture Fund investors expect modest returns over many years. Jones says he’ll be happy if the venture fund can double its investments in less than a decade. Every deal is different, but none so far asks for returns in the first two years. The venture fund eventually will get money back if a company is sold, or by gradually redeeming stock when a company turns profitable.
The first community development venture fund was created 25 years ago in Kentucky, but the idea only recently started to spread. Nick Smith, president of the three-year-old Community Development Venture Capital Alliance, says there are now at least a dozen active firms across the country, and more are coming. The alliance has 50 members, many in the process of starting funds. “I don’t want to be bombastic, but…it’s exploding, and we don’t know where the explosion will end,” he said during an interview from his car phone as he drove across Minnesota to a meeting one morning last fall.
Although the Boston fund is certain to lose some money along the way, “unless they can hire God to make the investments,” Smith says he knows it can make money, too. Northeast Ventures, the fund he started in rural Northern Minnesota in 1990, has invested in 18 companies and so far exited two “quite profitably.” The company put $600,000 into a medical device manufacturer in Roseville and got back almost $1.8 million, he said. The other investment, $250,000 to a wood products manufacturer in Aurora, produced a $600,000 return.
Risky Business
Demand has been high in Massachusetts. Boston Community Capital has seen more than 80 proposals. Venture fund staff are seriously considering about eight. Like traditional venture capitalists, they look for entrepreneurs who know what they’re doing and are likely to succeed. They also sit on the board of directors of each company, offer advice and help make big decisions. Jones readily acknowledges the risk, saying bluntly: “We could lose a lot of our money.” But, he adds, the early investments have been promising.
Valley Home Care opened in July and signed up 14 employees and several dozen clients by October. Five of the 10 field staff members moved off the welfare rolls when they started work. “We’ve made a name for ourselves,” says Margaret Miley, the president and general manager. “We’re getting a lot of people interested in the company.” In the next few years, she hopes the business will grow enough to employ 60 people, including many from the low-income Spanish-speaking and Southeast Asian populations of Lowell and Lawrence. If the company becomes profitable, the workers will have the chance to share the wealth by buying stock and becoming part owners, with representatives on the board of directors. The Boston Community Venture Fund’s $100,000 commitment to Valley Home Care helped attract other funding when the company was still just an idea floated by two nonprofits, the Merrimack Valley Project and the ICA Group, a nationwide organization that supports worker-ownership. The venture fund bought $50,000 of preferred stock last summer and promised to invest another $50,000 over the next year. That enabled the company to secure another $50,000 investment, from the Campaign for Human Development, an arm of the Catholic Church, and to borrow $150,000 from other sources. Valley Home Care has been using the money to cover expenses from office space to payroll during a two-year startup phase. Miley says the venture fund’s patient approach to profitability has been a nice change from the traditional investment industry, which she calls “obsessed with quarterly profits.”
Neil Silverston, who started a staffing firm for major employers, says the venture fund’s technical assistance has been just as valuable as its $50,000 investment. Boston Community Capital helped the young entrepreneur identify customers and find a key member of his management team. Now WorkSource Staffing Partnership is providing entry-level workers for several big businesses, including Brigham & Women’s Hospital and a grocery delivery service called Hannafords Home Runs. The firm has provided jobs for almost 100 people, including many former welfare recipients, supporting them on short-term contracts and helping them move into permanent positions. “They’re just smart businesspeople,” Silverston says of the venture fund staff. “When you’re a small company, it’s incredibly valuable to have that kind of strength to tap into.”
Almost half of the venture fund’s capital so far has come from the federal government. The U.S. Treasury’s Community Development Financial Institutions Fund announced a $865,000 investment last fall, plus a $135,000 grant for operational expenses. The biggest private contributor is BankBoston, which invested $250,000 through its new economic development wing. Grady Hedgespeth, president of the BankBoston Development Company, says the venture fund fills an important niche, reaching businesses too small to benefit from larger funding sources such as his own. “A few of them are going to fall by the wayside, but some are going to grow up to be the economic engines of the community,” Hedgespeth says.
Karl Seidman, an MIT lecturer who specializes in economic development, agrees there is a definite need for equity in low-income neighborhoods. But he is cautious about predicting immediate success for the Boston Community Venture Fund. “It’s a tough niche,” Seidman says. “What’s hard is to find the opportunities that do…generate the economic development benefits and do that in a way that allows you to get your money back. It’s very difficult.” But he adds: “It’s great they’re pursuing it. I hope we learn more about it.”
DeWitt Jones acknowledges the venture fund has already faced some difficulties. One of the planned investments, a composting company, did not pan out because the applicants could not solve their management problems. Jones says that’s to be expected when you’re working with startups. “That’s part of our mission, we do things other people won’t do….[But] if you’re going to do early stage stuff, you’re going to run into companies that aren’t quite ready,” Jones says.
The other big hurdle came in late October when the original venture fund manager left the organization to pursue other interests. After a few rocky weeks, Boston Community Capital chose Elyse Cherry, a former partner at the Boston law firm Hale & Dorr who was president of the venture fund’s board of directors, to take over.
It remains to be seen whether the venture fund can produce the large-scale neighborhood improvements its founders envision, and make money for its investors. But even at this early stage, one thing seems clear. It’s already making a difference in the lives of dozens of people like Gina Gonzalez.