We founded List Ventures in 2015 to address a critical need in our community.
From 2013–15, all three co-founders of List Ventures were part of a citywide contract from the City of LA’s Economic and Workforce Development Department designed to combat poverty and increase opportunity in underserved communities. The rationale for the program was simple: small and medium-sized businesses (SMEs) are primary engines of local economic growth, so these should be provided the necessary technical assistance to ensure their success. In practice, this entailed a wide range of consulting services offered at no charge to a variety of entrepreneurs, conducted in Spanish when necessary. With the support of Mayor Garcetti’s office, we were able to meaningfully engage a wide spectrum of LA’s entrepreneurs, and learn about their needs from the ground up. This program continues to be, in my opinion, one of the truly successful economic development interventions in a major metropolitan area.
Minority-owned SMEs were surviving but unable to grow without access to capital.
As we engaged more and more firms, it became immediately evident that the inability to access low-cost capital was the primary barrier faced by SMEs. This was caused by a multiplicity of issues, several of which we discuss in our case studies. The solution, however, was always the same: develop the firm’s accounting infrastructure so as to qualify for low-cost capital, which in turn funded the necessary investments to make the firm viable (ie, profitable). Again and again we preached this dogma, using a few success stories as illustrations. Again and again we saw entrepreneurs get it, implement it, and then fizzle out when it became clear that it was far more important for them to be out there selling than it was to manage the firm’s accounting. Clearly, this was a gap in the market that was holding back SMEs who would otherwise have been successful engines of economic growth.
Connecting minority-owned SMEs to growth capital requires a holistic approach.
List Ventures LLC became our solution. The core service was access to low-cost capital. This almost invariably required, however, that we back into access to capital by implementing an accounting package, properly monitoring financials, identifying key areas of growth, and assisting with the preparation of tax returns that certified the firm’s ability to pay their commitments. This seems rather straightforward, and I suppose it is, conceptually. But in practice it required a sustained partnership and a disciplined approach to the long game.
This can only work if approached collaboratively.
Given the investment required on our end, we decided to offer our services to a select number of portfolio companies that met certain criteria:
- CEO with the drive and ability to sell as well as a willingness to work collaboratively with us;
- A product or service with adequate longterm market demand; and
- A firm able to deploy debt as a strategy for continued growth.
We also limited our scope to a few high-growth industries, particularly transportation, engineering, and services. In impacted industries (retail, manufacturing), we looked for longterm value creation that challenged industry trends.
The results were gratifying and humbling. They included successes and, at times, failures as well. We describe these in our website: listventures.org/case-studies
New partnerships allow us to expand our scope to serve larger SMEs.
Within a few months of beginning operations, we had already refined our portfolio company profile. Startups and very early stage firms were not yet able to deploy debt strategically, so we offered them initial consulting, connected them to various partners, and kept in touch as best we could. Firms who required advanced capitalization structures were beyond our scope; they were operating at the level of processes, not people, which was not our interest. The sweet spot became firms with at least two years in business with revenues over $1M, those for whom low-cost capital could generate significant growth. These are the firms that have a local impact, the ones that generate revenue that circulates within their communities, the ones that create real opportunities for advancement. These are the firms for which the SBA was created because they’re the cornerstone of US competitiveness both at home and abroad.
Partnering with FAJ Consulting to serve SMEs with revenues over $5M per year.
In order to serve these larger firms we partnered with FAJ Consulting in 2016. Since 1996, FAJ has been focused on access to capital for minority-owned SMEs; from 2009–16, they funded $82M in loans to minority- and woman-owned businesses, of which $52M went to businesses within the boundaries of the City of Los Angeles. This was quite a heavy lift: the $82M was comprised of 146 loans over the seven-year period, an average of 20 loans per year. Each loan was a complex process that combined technical assistance with extensive preparation of financials, requiring a deep collaborative engagement with both the borrower and the financial institution.
Opening doors to more and more minority-owned SMEs.
Because FAJ could only serve firms with the infrastructure to implement proposed changes to their financial reporting, they had to turn away many entrepreneurs each month. In other words, if the firm could not generate financials with the required debt service coverage ratios, they weren’t yet ready for FAJ. These were entrepreneurs like those with whom we had worked in 2013–15, but at a larger scale. They were precisely the clients for whom we at List Ventures could make a measurable impact, and so we began our collaboration.
We had to look past administrative deficiencies to the core value of the firm.
It was another rewarding but difficult challenge. For instance, as part of our partnership with FAJ we took on as portfolio companies firms with pretty varied challenges, including:
- Firms selling $2M+ per year without any accounting package (and therefore unable to evaluate performance);
- Firms losing over $500k a year without the owner’s knowledge (we were told sales were coming through and bills were paid, so the business was doing well); and
- Firms which should have millions of dollars in their balance sheet that reported no assets, no accounts receivable, and no inventory in their tax returns.
Because these were owned by primarily Spanish-speaking entrepreneurs, no bank had bothered to look beyond their ridiculous tax returns to find the value at the firm’s core. Firms eligible for low-cost capital were constantly being turned away because of their subpar tax returns, which gave an entirely skewed picture of their performance. Because we spoke the language, their core value was clear to us. These were firms that, with the ability to monitor financials and develop performance metrics, could grow and prosper. Our approach with them remained the same as with our smaller portfolio companies; the primary difference was the scope and scale of the company’s needs.
The next step in the evolution of our business model.
Through this process, we learned a few more important lessons and eventually saw another big opportunity: the SMEs that we work with offer great investment opportunities if evaluated from a private equity perspective, with a few adjustments to the prevalent industry model. In other words, we could take this model of investment somewhere it hadn’t yet been utilized successfully, given a number of constraints.* Not only are these firms underperforming due to lack of access to capital, but, almost invariably, there is little adoption of tools and techniques that could significantly increase profit margins. In some industries–like transportation–this is particularly prevalent. Transportation tech, for example, has developed at a rapid if choppy pace. Because venture capital and investment in the space has increased, new SAAS-based Transportation Management Systems (TMS) have been lately rolling that could empower SMEs to run both effectively and much more profitably. And so, this has become the next step in the evolution of our business model: bring growth equity investing into SMEs so as to grow these firms while yielding competitive returns to investors. We’ve called this new venture Sophist Capital. Visit our site at sophistcapital.com