October-November 2012 » October 30th, 2012
Written by: Eric Baca
Daniel Salcedo remembers the time he spent building his first company. He remembers the hours he spent making phone calls to would-be investors and venture capitalists who were looking to put their money in a Latino-owned and operated company.
Salcedo and Co. — he had started the venture with some local friends — needed money to get his idea off the ground, not metaphorically speaking. The young startup had a not-so-crazy-after-all idea of putting a camera on a remote-controlled rig and giving aerial views of their hometown of Houston. This was at least a decade before the advent and celebrated success of Google Maps.
To generate true interest in the vetting process, Salcedo built the idea around people, and soon the idea morphed from a simple camera to the prospect of building one of the largest balloons ever created, one large and durable enough for people to fit inside and tour the city.
“I always wanted to do cool things,” Salcedo said. “Very early on, I realized I had a unique ability to get people to do big things.”
The “big thing” Salcedo needed was people to invest in his idea. The difference between the two concepts was a matter of scale, which, even more importantly, was a matter of capital. As a young man, Salcedo had no assets to put up for a loan. He needed investment to turn their idea from an adolescent fantasy into an adolescent reality — Salcedo started his plan when he was 13 years old.
But Salcedo, two decades late is running tech startup Mobcart in Chicago. He was learning the mechanics of the pitch well before reality TV shows made it hip and trendy within the last decade, or before CNN’s “Black in America 4: The New Promised Land” highlighted the not-so-diverse SiliconValley startup community.
The numbers — although inarguably low relative to the population size — show that minorities, including Latinos, are representing a new class of entrepreneur — a more sophisticated, educated and well-connected version. For some analysts, this signals a new era of Latino entrepreneurism.
Business consultant and Latino entrepreneur Moe Vela said that when you combine the inherent qualities of Latinos — risk taking, hard-working, strong family ties — the investment in a Latino business is an intelligent business move.
“Latino entrepreneurs are some of the most resilient, resourceful and perseverant business owners in the world,” Vela said. “So even if we were not the fastest-growing segment of the American population with an enormous buying power, it would still be good for the American enterprise system to start, support, nurture and encourage Latino businesses. Latino businesses in our country makes good business sense.”
The business case for investment in Latinos both in marketing dollars and businesses has been well made. The release of both the U.S. Census in 2010 and more recent reports by Nielsen Media have more than adequately demonstrated the burgeoning power of Latino entrepreneurs. Yet, even with all the data, the lack of accessible startup funds leaves many Latino businesses stalled at the idea phase.
According to a report released by the Kauffman Foundation, Latinos, since 1996, account for 22.9 percent of new entrepreneurs in the U.S., and yet less than 5 percent of early stage funding actually goes to Latino entrepreneurs.
“Access to capital is by far the greatest challenge that confronts any business startup,” Vela said. “We … make for great entrepreneurs and followers of the American dream, but are too often stifled by the inaccessibility of capital.”
Typically, to get access to capital, an entrepreneur has to demonstrate that he or she is financially invested, what’s known in the industry as “skin in the game.” Much of that is determined by personal wealth, and there again Latinos are nowhere near their white counterparts. Wealth level among whites are upwards of 11 to 16 times higher than those of Latinos, says a report by the Minority Business Development Agency.
This is one of the fundamental reasons Latino businesses struggle to find capital resources, says Javier Palomarez, President and CEO of the United States Hispanic Chamber of Commerce.
“Hispanic businesses have had a harder time, not because of a negative credit history, but because so often the proprietor has little or no credit history,” he said. “This is in stark contrast to family businesses that have been passed down for generations, which is a more common scenario in the mainstream business community. Similarly, entrepreneurs who are newer to our country may not be familiar with the private and public resources and agencies available to help them with regulatory and operational concerns of growing the business.”
A generation ago, venture capital didn’t exist in a Latino businessman’s lexicon, let alone as a viable tool to launch a company. Now, words like “equity” are becoming commonplace among entrepreneurs like Salcedo, who says the resourcefulness of Latinos will ultimately close the gap between those who have access and those who currently don’t.
“I would agree that there is a gap, a shortcoming,” he said. “It may just be generational. It may be something that we live with for the next 25 years, and then work its way through.”
Salcedo isn’t waiting for that to happen. As a resourceful Latino himself, he’s ensuring that 25 years is the maximum. He, along with fellow Chicago startup gurus, Juan M. Hernandez and Joshua Hernandez (no relation) are not only helping to fund new Latino entrepreneurs, but they are building a model that allows them to impart the wisdom they’ve amassed in their own startup ventures.
With their inspiration coming from Silicon Valley’s Y Combinator and the Chicago-based Excelerate Labs, the group formed Nuevo Labs, a business accelerator and incubator program. The intent, says program manager Juan M. Hernandez, is to bring together the three necessary tools for any startup:seed capital, a proven network and mentorship.
“That fits nicely with the blueprint of business accelerators,” he said. “We are all about bringing new resources to the startup ecosystem: new talent, new ideas, new kinds of entrepreneurs and new kinds of entrepreneurship. That’s the big goal we’re after.”
Juan M. Hernandez walked away from his full-time corporate gig last year, when the opportunity cost of dabbling with a side project finally proved too high. He can relate to budding entrepreneurs eager to launch their project.
Entrance into the program will net a startup $25,000 and temporary residence in the newly-opened tech hub, 1871, a large — 50,000-square foot — space that sits on the 12th floor of the Merchandise Mart. But perhaps more important than even the digs and the cash is what Juan M. Hernandez calls “a warm introduction,” which in startup circles is many times more valuable, as willing and interested investors are paired with entrepreneurs.
“We want to provide access to the right people in the investment industry, people who can help launch a next round of funding,” Juan M. Hernandez said. “Not only that, but access to people who will get you to your customers.”
Although open to all backgrounds, Juan and Josh Hernandez and Salcedo are focusing a large proportion of their outreach toward Latinos, which is both a deliberate business decision and part of its contribution to the larger ecosystem. To do this, they’re looking into key cities with large Latinopopulations: Miami, Los Angeles, Austin, New York. Those efforts are not simply for applicants for Nuevo Labs. They are also building a syndicate of Latino entrepreneurs and investors to substantially increase the capital available to Latino business.
“We will be a catalyst, a bridge, a converter of this young, raw Latino talent, and we’re going to convert them into successful businesses that are going to help drive the long-term economic growth of a nation,” Juan M. Hernandez said.
That’d be fluff, if it weren’t for the continued explosion of the Latino population, which according to Pew Hispanic Center is projected to represent nearly 30 percent of the total population by 2050. More relevant perhaps is that Latinos are starting businesses at a substantially higher rate than thenational average. Long-term investment, indeed.
“This represents an opportunity, an opportunity that can prove to be really juicy and a solid way to produce new investment opportunities without having to leave U.S. shores,” Salcedo said.
Joshua and Juan M. Hernandez and Salcedo are part of a five-person team that is reimagining the outlook for Latino startups. Working from the inside out doesn’t work in an industry where minority angels account for 4 percent of the angel population (Center for Venture Research). That’s where experience matters and among the trio of visionaries, they have about a life’s worth. Joshua Hernandez is the Founder in Residence at Lightbank, an investment firm that goes out of its way to let enentrepreneurs know that “you’re not in the Valley anymore,” and that disruptive technology isn’t reserved to West Coast residents.
Lightbank’s site is a startup’s dream. Applicants don’t need a lawyer or CPA sitting next them to understand what Lightbank is offering. The deliberate omission of wordy financial jargon is replaced by succinct sentences that show potential investees that getting started isn’t as complicated as it once was.And Joshua Hernandez should know. At present, he has built five companies and is always looking for the next one. The “consummate inventor” is always about the next two years’ technology and not getting left behind focusing on today’s. He has the mindset of a builder with the chops of a seasoned VC.
What’s come with that are invaluable lessons about the process, the game and a lot of finesse. Growing up in Puerto Rico and New York, Joshua Hernandez said that of all the barriers he has faced in obtaining capital, none of them include racism. In the professional world, he said, “now that I know what I am doing, it has not
become visible to me. I don’t feel I have any more or less access to anything — ever.”
He wants the best, and he’s willing to give them money and guidance to make sure he does. He doesn’t deny the disparity between Latinos and whites in the space, but says that Latino entrepreneurs need to focus on making solid business plans and worry less about race and background as a deterrent to asking for money.
Now Joshua Hernandez occupies two seats at the table. In addition to being the entrepreneur looking for capital, he’s now the shrewd, calculating businessman, and as such, he’s not just simply looking for Latino surnames to fill his portfolio.
“If I can put capital in my community, and my community happens to be Hispanic-dominated, and I can create other opportunities for other kids that grew up similar to me, I would totally do it, but that would only take them so far,” he said. “My partner (Justin Moore) and I don’t fit the stereotype of a venture that gets funded. But we never thought of it that way. To us, we were just building something. To us, it wasn’t clear that that was any kind of impediment at all.”
With Nuevo Labs, Joshua Hernandez is hoping to mentor those young business owners, many of who come in with a limited mindset that has been instilled in them from their childhood. He applauds the efforts of organizations like Chicago’s Future Founders, a non-profit that provides low-income students with examples and mentors to educate and, in some sense, re-educate teenagers.
Joshua Hernandez believes that technology careers and businesses, like ones he’s started and operated, could be a new industry for Latinos, if they know of those positions earlier.
“I talk about the fact that there is a lack of Latinos in technology for sure,” he said. “But I think it’s mostly because they are not exposed or understand that there are opportunities there, or maybe they’re not brought up that way. The fact that somebody would give you a million dollars to build an idea is a foreign concept to that culture.”
Although a small percentage of the angel population, there are Latino VCs and angels out there. Joshua Hernandez said he never directly sought them out, but he has met some, and said that they are just like non-Latinos — businessmen to the core.
But some VCs, even Latino ones, say that having somebody in the room who understands the culture characteristics of the Latino business owner is imperative to this process. A West Coast VC firm, Vnesto Capital provides capital to small and medium-sized businesses both domestically andinternationally. Their managing director, Ricardo Tejada, said that education of what’s available still remains the primary issue when he meets with Latinos looking for capital. Pumping knowledge, then, into the Latino business machine is the only thing that will propel it forward.
“I think there are a lot of Latino businesses that are poised to really do well if they ask for capital, obviously if they have an adviser to help them do that. The surprising thing is that a lot of them don’t now what’s out there. We have to cultivate a mechanism that it is in our schools, and some type ofprivate company organizes creative thought, entrepreneurial thought. We have to be able to create the next big thing; that’s the only way we’re going to be able to compete.”
Sensitive to the limitations in Latino households, Tejada said his firm takes it as its responsibility to actively seek out Latino startups. So much so, that Vnesto Capital takes on Latino businesses at a discounted rate, hoping to take them to “the next level. Generations like mine, we are very up to speed, whether it’s crowd funding, whether it’s angel investing, whether it’s venture capital,” he said. “We grew up with that from our studies at the universities. That’s what we do first. From my experience, the No. 1 way that was taught was equity. It wasn’t until I graduated that I understood more about debt, so it was almost reverse what people normally learn in the overall business world. They think of debt first, and then they think of equity.”
But it’s not just a foreign concept to the startup entrepreneur, but also to the scant number of Latino angel investors. Juan M. Hernandez said that in order to successfully sustain Nuevo Labs, they need to get the buy-in from the established Latino business community. That might be the hardest of sells, considering many of those entrepreneurs didn’t have access to the same education and programs thatthis generation does. Some are resistant simply because they may not see the larger picture, Juan M. Hernandez said.
“We are making our case to the very scarce Latino angel population … those Latinos who have made it,” he said. “We are making the case to them that this program will serve as a catalyst to the next generation of Latino entrepreneurs, not just the 10 we choose for the program for the first year. It’s always for the larger community to serve as an aspirational symbol. This isn’t just for what you perceive as a traditional entrepreneur. This isn’t just for the Mark Zuckerbergs out there; it’s also forpeople like you.
“That’s basically the message we are presenting. I understand how (they) created their business was a lot different, but the environment that stands today — this technology wave — is the next step into the future. We don’t want for our community to be left out of that process. There’s a big gap there, and we’re not getting access to it, and our program is going to provide access to it. We see that as a space we can operate in. To a certain extent, that’s the message we are providing to the older Latino angels.”
More than that, the development of these companies mean more than just wealth creation within the Latino community. Palomarez and others like him remain strong voices and champions for Latino enterprise and contend that access to capital for Latinos is access to capital for American businesses. In that case, Palomarez is as much a guy selling an idea to a VC as Nuevo Labs’ founders.
“Latino business is American business,” he said. “These are not two separate things. Latino business is the most dynamic and entrepreneurial segment of the American economic landscape. While we are proud to advocate on behalf of business owners who happen to be of Hispanic decent, we never forget that we are first and foremost American businesses. Every product we manufacture, every service we provide, every job we create and every child we educate — goes to benefit this American economy.”
For the record, Salcedo did get his first company off the ground. No Limit Hot Air Balloon became a local sensation and proved to Dan that with a good team, a good plan and some necessary capital, anything could happen, even a group of teenagers making a fully-functional hot air balloon that would take flight over Houston.
They got their wings — courtesy of some angels.